The Trailing Stop in Forex Trading

The trailing stop is a useful tool for forex traders as it helps reduce losses and potentially increase profits by avoiding missing further profit potential when exiting at a preset take-profit limit.

The trailing stop in Meta Trader is triggered as soon as your position moves into profit by the amount of the pips determined by your trailing stop value in which case the stop-loss will move (up or down depending whether it is a Buy position or Sell position) by the same amount of pips determined as trailing stop plus the spread between the bid and the ask price. After that, if the favorable move continues, the stop-loss will follow pip by pip the market price.

There are three important things to remember when using a trailing stop in forex trading with Meta Trader platform:

• It is triggered only if your position moves into profit by at least the amount of pips you determined as your trailing stop

• Once it is triggered, it moves the stop-loss value, which trails the market price by the same amount of pips as defined originally, as long as the profit increases. So in a buy position, once the trailing stop is triggered, the stop loss value will always go up as the market price moves up and in a sell position the stop loss value will go down as long the market price goes down.

• If the exchange rate moves against your position, after the trailing stop funtion has been triggered, the stop-loss will not change and if the exchange rate continues to move against it until the stop-loss is reached the trade will close at the latest stop-loss.

In order to explain how the trailing stop works let's assume that we have a Buy position of EUR/USD at 1.5000 and that we determine a stop-loss value at 30 pips from the entry price. Thus, we use a stop-value of:

Stop-loss value = Entry Value – 30 pips = 1.4970

If this was a Sell position then the stop-loss would be:

Stop-loss value = Entry Value + 30 pips = 1.5030

To explain how a trailing stop works assume that we place a trailing stop of 20 pips. This can be done easily in Meta Trader by right-clicking on the order for which you want to place a trailing stop and selecting the Trailing Stop submenu. Once you do that you will be able to either choose a preset amount of pips or enter a custom number by clicking on the "custom" option at the bottom of the submenu.

Let's see how a 20-pip trailing stop will work with a Buy entry at 1.5000 and a stop loss at 1.4970 (-30 pips). Let's assume also a spread between the bid and the ask of 3 pips, which means at the entry price the profit is -3. With these assumptions, the trailing stop will be triggered at the following price:

Trailing stop trigger price = Entry price + Trailing Stop + Srpead = 1.5000 +0.0020 + 0.03 = 1.5023

New stop-loss value at trailing stop trigger price: 1.5023 -0.0030 = 1.4993

Once your position moves to the new stop-loss it guarantees that if the trade eventually closes against you your loss will be only 10 pips and not 30 as was implied by the original stop loss.

If the price moves further to 1.5040, then the stop loss value will move up as well to 1.5010 (1.5040 - 0.0030) but if the price drops to 1.5010 instead of rising to 1.5040 the stop loss wil not change and will remain at 1.4993.

If you have an interesting comment in relation to this article please use the form below Related Posts to submit it. Please read submission guidelines before writing and submitting your comment.

Search Our Over 700-Page Website!