Risk management is very important in forex trading. In this lesson, we will talk about trailing stops, a way to minimise your risk. A Forex trailing stop is a type of trade order that helps to protect your profits by automatically adjusting your stop loss price as the market moves in your favour. This type of stop loss order is especially useful in volatile markets, where prices can move rapidly and unexpectedly.
When you place a Forex trailing stop order, you specify a stop loss price that is a certain percentage or number of pips below the current market price. For example, you might place a trailing stop order with a stop loss price that is 20 pips below the current market price.
If the market price then rises by 20 pips, your stop loss order will automatically adjust to the new market price. So, if the market price then falls and hits your stop loss price, your trade will be closed at the new, higher price. This allows you to lock in some of your profits while still giving the market room to move in your favour.
Trailing stop orders can be placed with most Forex brokers and are a useful tool for Forex traders of all experience levels.
When is a Trailing Stop Used by Forex Traders?
There are a few different scenarios where a Forex trailing stop might be used by traders.
One common use for a trailing stop is to lock in profits on a long-term trade that is showing signs of reversing. For example, let’s say you buy EUR/USD at 1.20 and it starts to move higher, eventually reaching 1.30. You might then place a trailing stop order with a stop loss price of 1.25, which is 20 pips below the current market price.
If the market price continues to rise, your stop loss order will automatically adjust to the new market price. So, if the market price reaches 1.40, your stop loss order will be at 1.35. If the market then reverses and falls to 1.35, your trade will be closed at that price, locking in a 35-pip profit.
Another use for a Forex trailing stop is to minimize losses on a trade that is going against you. For example, let’s say you sell EUR/USD at 1.20 and it starts to move lower, eventually reaching 1.10. You might then place a trailing stop order with a stop loss price of 1.15, which is 20 pips below the current market price.
If the market price continues to fall, your stop loss order will automatically adjust to the new market price. So, if the market price reaches 1.00, your stop loss order will be at 1.05. If the market then reverses and rises to 1.05, your trade will be closed at that price, limiting your losses to 15 pips.
Trailing Stop Dilemma: A tight Stop or Wide Stop?
One dilemma that Forex traders face when using trailing stop orders is how wide to set the stop loss. A wider stop loss will give the market more room to move before your trade is closed, but it also increases the risk of being stopped out. A tighter stop loss will limit your risks, but it also means that your trade could be closed prematurely if the market reverses.
Ultimately, the decision of how wide to set your stop loss is a personal one and will depend on your own risk tolerance and trading style. If you’re a conservative trader, you might want to set your stop loss closer to the current market price. If you’re a more aggressive trader, you might be willing to set your stop loss further away from the current market price.
How to Use Trailing Stop?
Now that we’ve covered what a Forex trailing stop is and how it can be used, let’s take a look at how to place a trailing stop order.
Most Forex brokers will allow you to place a trailing stop order from their trading platform. For example, if you’re using the MetaTrader 4 (MT4) trading platform, you can place a trailing stop order by right-clicking on your trade and selecting “Trailing Stop.”
Once you’ve placed your trade, you’ll then need to enter the size of the stop loss. For example, if you want to set a 20-pip trailing stop, you would enter 20.
Once you’ve entered the size of the stop loss, your trailing stop order will be activated and will adjust automatically as the market price moves in your favour.
It’s important to note that you can also manually adjust your trailing stop order at any time. So, if you see that the market is about to reverse, you can adjust your stop loss to a tighter level to limit your losses.
Conclusion
A Forex trailing stop is a type of trade order that can help you to protect your profits and limit your losses. Trailing stop orders are placed with a Forex broker and are triggered when the market price hits a certain level. If the market price then moves in your favour, the stop loss order will automatically adjust to the new market price. This allows you to lock in some of your profits while still giving the market room to move.
If you’re thinking about using a Forex trailing stop, be sure to test it out first on a demo account. This will allow you to get a feel for how it works and how it might impact your trading.
The risk involved with forex trading online shouldn’t be overlooked. There is a chance of losing a significant amount of money if you don’t know what you’re doing. It is crucial to gain a knowledge of the market prior to you even begin investing with money. Keep reading our lessons.