How to Use Trailing Stop Loss

When the market takes a turn for the worse due to emergencies, it is easy for your original profits to immediately turn into losses. Especially for Forex beginners who do not have much experience, it is very necessary to understand how to make profits in the Forex market while limiting losses to a certain range. Today, let’s talk about trailing stop loss.

What is a trailing stop?

Before talking about trailing stop loss, let’s first review stop loss (Stop Loss) concept. After a trader opens an exposure, if the euro depreciates and the dollar strengthens, the price changes in a direction that is unfavorable to the trader, resulting in a book loss. At this time, in order to control risks and prevent unlimited expansion of losses, it is necessary to stop losses and retain strength for subsequent transactions. At this time, it is still necessary to close the position to stop the loss. Stop loss can be stopped manually or by setting a stop loss order in advance. A stop-loss order is also a limit order. When the price reaches the price restricted by the trader, it becomes a market order to complete the closing action. Professional traders often review their exposures at the end of the trading day to ensure that losses during the break did not exceed their established risk tolerance.

Trailing stop loss, also known as trailing stop loss, means setting a stop loss of a certain number of points following the latest price. It is triggered as the Forex price changes in the favorable direction of the position. It is an instruction set when entering the profit stage, with the purpose of realizing most of the book profits; at the same time, when the transaction reverses by a specified number of points, the trailing stop loss order is triggered and the transaction is automatically closed, thereby achieving the purpose of continuously locking in profits and avoiding risks. After setting an appropriate trailing stop loss, the investment risk can be effectively limited within a certain range, and traders can continue to make profits until the price trend does not change.

What is the difference between a trailing stop order and a fixed stop order?

A fixed stop-loss order means that Forex investors place an order and set a stop-loss price. When the market reaches this price, the stop-loss order is triggered and the transaction is exited.

For example, a Forex trader chooses to hold a position in EURUSD. The trader's entry price is 1.1778, the stop loss is at 1.1720, and the take profit is 1.1900. Then if EURUSD falls to 1.1720, the trader's long position will be liquidated and the trader's transaction will be closed.

This is how a fixed stop order works, it is relatively simple.

Trailing stop orders work the same way (i.e. if the trailing stop price is hit, the trader's trade will be liquidated). But where the deal closes is different. Unlike a fixed stop order, a trailing stop order will continue to trail the order, ensuring that some profits are locked in.

To give a simple example, a Forex trader chooses to hold a position in EURUSD. The trader's entry price is 1.1778. The trader uses a 25-point trailing stop, and then sells when the exchange rate hits 1.1753 yuan. If the exchange rate rises to 1.1900 yuan, the price the trader sells will move up to 1.1875 yuan. And so on. This protects traders' profits. Trailing stop loss not only protects traders' profits, but equally important, it also protects traders' principal.

When Forex traders want to use the trailing stop function, they must first determine whether the selected Forex broker allows this function. Also, determine whether the trading platform offers this feature.

How does a trailing stop order work?

Setting a trailing stop loss is very simple. Investors need to follow the latest price and set a stop loss of a certain number of points. It is only triggered when the exchange rate changes in the favorable direction of the position. It is an order set when entering the profit stage. By raising the stop loss trigger level as a position becomes increasingly profitable, Forex traders can ensure that they will still realize the majority of their paper gains if the market moves in the opposite direction. Regardless of whether investors are experienced or not, they can set a trailing stop loss. This is a very simple and easy-to-use instruction.

Trailing stops can be set based on the high or low of daily trading price fluctuations, or as a percentage of the distance from the trading bottom. Assume that after the trader sets a trailing stop loss (for example, 25 points), the trader holds a long position on EURUSD at 1.1778, the stop loss order is at 1.1753, and the take profit order is at 1.1803.

When setting a trailing stop loss order, you can do so by specifying a number of points. On the MT4 trading platform, trailing stop orders can be set from the order window.

Just right-click on the open trade and select "Trail Stop"

The image below shows how to enable the trailing stop function on the MT4 trading platform.

Trailing stop loss order function on the MT4 platform

In the image above, you can see that traders can choose to trail stop orders based on the default pips, or they can choose custom options and set their own pips.

It should be noted that the point refers to the fifth decimal. Therefore, a 50 pip trailing stop is nothing more than a 5 pip trailing stop order.

Going back to our example, if we set a trailing stop order of 100 pips (i.e. 10 pips), this means that if the price drops by 10 pips or more, the trader's trailing stop order will be automatically closed.

So, if EURUSD rises from 1.1778 to 1.1788, the trailing stop order will move to 1.1778. If EURUSD continues to rise towards 1.1900, the stop loss order is moved from 1.1778 to 1.1890. Now, if EURUSD reverses and falls to 1.1890 or lower, the trader's position will be automatically closed as the trader's stop loss is at 1.1890.

What are the advantages and disadvantages of using trailing stop orders?

The benefit of using a trailing stop order is very simple. Trailing stop orders can significantly protect profits when Forex prices move in a position's favor. In other words, trailing stop orders leave no meat on the table.

However, on the other hand, trailing stop orders can cause traders to exit their trades prematurely. Since prices in the Forex market rarely move directly in one direction, trailing stop orders can cause traders to exit their trades prematurely. Therefore, when a trader is targeting a 100 pip move, a trailing stop order may cause the trader's trade to close at 50 pips.

However, there are situations where a trailing stop order is a better solution than a fixed stop order.

Trailing stops are also widely used in the stock market. However, investors can choose points or simply set a percentage. Therefore, if a 10% trailing stop is set, if the stock price drops by 10%, the trailing stop will be automatically triggered.

Trailing stops are probably one of the easiest ways to protect profits when trading. However, make sure traders use trailing stops wisely. Choosing a trailing stop that is too small may cause the trade to be closed prematurely. However, choosing a trailing stop order that is too large may result in having to wait endlessly until the price moves to the trader's set number.