Trailing Stop Definition Forexpedia by BabyPips com

Another helpful tool is the Risk Manager, which can also control risks and stops and keep risk management under control. By using these tools, traders can free up their time and energy to focus on making more informed and profitable trading decisions. One of the biggest challenges of using trailing stops is determining the right distance to place your stop order. If you set it too far away, you risk losing a significant portion of your profits if the price suddenly reverses.

When your chosen criteria are met, the level of a trailing stop order will also generally be adjusted either automatically or manually by a certain amount higher on long positions and lower on short positions. The usual purpose of using a trailing stop is to keep a profitable position in a currency pair open as long as the exchange rate continues trending in its favor. A trailing stop loss strategy is a great way to maximize your profits and prevent excessive losses. You do this by specifying how much you want the price to continue moving in your favour before it is automatically closed for good. A Forex trailing stop is an order that automatically adjusts based on price fluctuations, helping traders manage risks and effectively protect their profits. However, this tool comes with advantages, certain peculiarities, and pitfalls that traders should be aware of to trade effectively.

This example shows how setting Trailing Stop helps traders in avoiding unexpected losses. However, Trailing Stop doesn’t have to be set only before you’re going to walk away from your trading terminal. As shown in the above example, as soon as the price hits 112.80, Trailing Stop feature is automatically activated, and Stop Loss begins to move up along with the price at a distance of 80 points.

  1. If you invest in a particularly volatile currency pair, the stop level may be triggered repeatedly – resulting in a series of small losses.
  2. Shrewd traders maintain the option of closing a position at any time by submitting a sell order at the market.
  3. Trailing Stop is placed on an open position, at a specified distance from the current price of the financial instrument in question.
  4. As the price pushed steadily toward $92, it was time to tighten the stop.

Please send us an email at and we will get back to you as soon as possible. Here we can see how to move the trailing stop in stages below the moving average, as the value of EUR/USD surges. Trailing Stop feature of MT4 differs from that of Stop Loss and Take Profit in that it’s inactive when the computer is turned off. Therefore, if you want Trailing Stop to perform what is the difference between data and information? its functions when you’re not around trading terminal, make sure to leave your computer on. To do it, you need to right-click on an open trade, select “Trailing stop” in the pop-up menu and click “None” in the next pop-up menu. To enable the Trailing Stop feature, right-click on an already open position and select “Trailing stop” from the pop-up menu.

Does Not Guarantee Profits

Based on the recent trends, the average pullback is about 6%, with bigger ones near 8%. Even minor pullbacks tend to move more than this, which means the trade is likely to be stopped out by the trailing stop before the price has a chance to move higher. A trailing stop is a way to automatically protect yourself from the downside while locking in the upside. When the price goes up, it drags the trailing stop along with it, but when the price stops going up, the stop loss price remains at the level it was dragged to. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.

As the asset’s current price increases by $0.1, the stop will also rise while keeping the 0.50 distance. Another factor is the time frame you are using because most traders use them on time frames of one hour or more. You can also use Trailing Stop Losses with the M15 timeframe which is very popular among scalpers, but keep in mind that this setting implies higher risk so you should be careful when using it.

Some Tips for Using Trailing Stop Loss in MT4

You can also use it to lock in profits when your trade is doing well and increase the percentage of profit if possible without risking too much capital on each trade. During quieter times, or in a very stable stock, a tighter trailing stop loss may be effective. That said, once a trailing stop loss is set for an individual trade it should be kept as is. A common trading mistake is to increase risk once in a trade in order to avoid losses. This is called loss aversion (disposition effect in the context of markets), and it can cripple a trading account quickly. The key to using a trailing stop successfully is to set it at a level that is neither too tight nor too wide.

What Is A Trailing Stop Loss in Forex?

In this example this means our first trail would update our stop to 103.27, effectively moving out position to break even. From here the trailing stop will continue to lock in profit every time the trade moves in our favor the selected amount. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.

These benefits both argue strongly for incorporating trailing stops into most money and risk management plans. You can use the average true range (ATR) indicator and the Chandelier Exit strategy to assess the average volatility of a currency pair. This action lets you avoid setting your trailing stop where it will be executed on a mere pullback instead of on a substantial market reversal. Some forex traders choose to use a trailing stop as part of their overall money and risk management strategy. It is a tool that can be employed in various ways to fit the needs of the individual trader. Some forex traders place a trailing stop order simultaneously when they initiate a trading position.

How Does a Trailing Stop Work?

Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. If you invest in a particularly volatile currency pair, the stop level may be triggered repeatedly – resulting in a series of small losses. Trailing stops are effective because they allow a trade to stay open and continue to profit as long as the price is moving in the investor’s favor. In general, most traders favor percentages for trailing stops since they are better able to reconcile changes across different securities (e.g., $1 may be a 10% move in one stock but less than 1% in another). But, to lock in a specific dollar amount of a trade, you may prefer to utilize a fixed price trailing stop. Here is an example, let’s say that you want to go long on EUR/USD, and you set an emergency stop that will be triggered if the market ultimately moves against you.

Trading Forex With a Trailing Stop

Since uptrends consist of higher highs and lows, the lows can be used as a potential stop-loss level. This is because even if the trend holds onto the position, there is little to no chance it would close below the higher low. For example, you open a position at the EUR/USD market for $500 and set your stop-loss order at $10. Since you have a stop-loss order at $10, the trade is automatically closed if the price falls below $510. It is a trade order that allows you to set a maximum value of loss that you are willing to incur.

Although stops are intended to protect your capital, placing them too aggressively near the price can gradually deplete your account as you get stopped out repeatedly. Let’s use a real-world example of a forex pair to illustrate this stop-loss order type. Explore our intuitive forex trading platforms, mobile apps and advanced third-party technology.

Although there are significant risks involved with using trailing stops, combining them with traditional stop-losses can go a long way toward minimizing losses and protecting profits. When combining traditional stop-losses with trailing stops, it’s important to calculate your maximum risk tolerance. For example, you could set a stop-loss at 2% below the current stock price and the trailing stop at 2.5% below the current stock price. As share price increases, the trailing stop will surpass the fixed stop-loss, rendering it redundant or obsolete. Many professional strategic forex traders do use trailing stop orders, although large-scale professional market makers might use mental stop levels instead to avoid exposing their order levels to others. Like a stop-loss order, a trailing stop is generally not a guaranteed stop level.

The main disadvantage is that the trader needs to be online all the time in order for his or her trades to work out well. This means he will always need to monitor what’s happening on his trading account, particularly when it comes to whether a trade has hit its predetermined price/level or not. If the trader is away from his computer for a while and misses out on this, then he might end up having to sell or buy at an unfavourable price. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading.

You will also need to use criteria that make sense for the particular currency pair you are trading. If the pair has low volatility, then you can use a tighter trailing stop. If the pair moves dramatically on a regular basis, then you will want to use a more distant trailing stop. Basically, you want to avoid setting a trailing stop too close to the current market exchange rate since it would be subject to an early execution based on background market volatility.