In today’s article, we are going to shed light on a trading tool used for exiting positions. It’s called the trailing stop. It is a suitable option in situations where the traders wish to snatch maximum profits while keeping the risks under control. With that said, this tool has a number of subtle aspects you should be aware of.
Let’s start off with the definition of the trailing stop. In essence, this is an algorithm that controls the stop loss and does the following thing:
This allows the trailing stop to follow the price progressively as the profit in a trade increases. In cases where the price reverses, the stop loss will stop and the position will be closed once it is reached.
After figuring out what trailing stop is all about when it comes to the Forex market, let’s discuss how it is placed.
As you can see, it is placed differently but that’s not the only thing that makes it different from our regular stop loss. First of all, the trailing stop moves your stop loss automatically following the price. Second of all, unlike regular stop orders, it works in the client terminal and not the server. This is why it is not going to work unless your MetaTrader 4 or MetaTrader 5 is running.
If the stop loss has been already set using the trailing stop, it will still protect your trade when your terminal is off but it won’t follow the price. If you haven’t placed the stop loss yet, your position will remain unprotected when you shut down the terminal.
We have already tackled the two major peculiarities of the trailing stop (its algorithm and how it works). We can now safely proceed to explore the situations where it should be used. Here are they:
It stands to mention that managing positions using the trailing stop is not super convenient as the trading terminal must be always on for this. To address this nuisance, developers have come up with various Expert Advisors that work on the same principle as the trailing stop. However, the analysis of their backtesting has not shown any major advantages as compared to the placement of protective orders such as stop loss and take profit.
When learning the ropes of the trailing stop, it’s important to understand that it is no Holy Grail but rather a helpful tool in situations where it makes sense to place it. At the same time, you should avoid common mistakes when using it.
There should be a good reason for placing the trailing stop. First and foremost, it has to complement and improve your strategy. The trading system comes first—remember that. As practice shows, this is one thing most traders fail at. What you need to do first is reboot your trading and then you can consider upgrading your strategy with the trailing stop.
The best and the most efficient way to do that is to sign up for the Reboot training course. Positive feedback and comments from those who have already completed this training program speak for themselves.
Pimp your strategy, get the relevant feedback from a professional trader and learn whether or not you need to use the trailing stop in your specific situation.Login in Personal Account