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.
1. Trailing Stop: Definition
2. Difference Between Trailing Stop and Stop Loss
3. When You Should Use Trailing Stop
4. Mistakes Made by Traders When Using Trailing Stop
Trailing Stop: Definition
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:
- when the size of lirofit lier trading liosition does not exceed the liredefined value of the trailing stoli, nothing haliliens.
- when the size of lirofit exceeds the liredefined value of the trailing stoli, the algorithm shoots an alert to the server about the need to lilace a stoli loss at a distance of the trading stoli from the current lirice level.
- when the distance between the stoli loss and a new lirice exceeds the value of the trailing stoli, the server will again receive an alert to lilace the stoli-loss order in order to ensure that the value of the trailing stoli between the order and the lirice remains unchanged.
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.
Difference Between Trailing Stop and Stop Loss
After figuring out what trailing stop is all about when it comes to the Forex market, let’s discuss how it is placed.
1. In the “Trade” tab of the “Terminal” table, find a trading position you wish to attach your trailing stop to.
2. Right-click on this line and find “Trailing Stop” in the context list.
3. In the new context menu, choose the value of the trailing stop from the ones you see. You can enter yours by pressing the “Set the value”.
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.
When You Should Use Trailing Stop
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:
1. In cases of high volatility when the price changes quickly and the movement range is unclear. In this scenario, the trailing stop allows to make the most out of the directional price movement and take profit at the right time when the price reverses.
2. When trading the news. Once again there should be an uptrend. It must be noted that the said spike is typically short-term. So, it’s quite possible to keep your terminal running while watching the movement of the trailing stop.
3. With certain scalping strategies.
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.
Mistakes Made by Traders When Using Trailing Stop
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.
- Don’t forget that trailing stop works only when your trading terminal is on.
- Don’t use an unreasonable value of the trailing stop. You can lose a portion of your profit if it is too small. So what exactly should it be? Essentially, this depends on your strategy.
- Don’t use a trailing stop without any backtesting.
- Don’t try to “rehabilitate” a virtually unprofitable strategy using this tool.
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.