When it comes to risk management a key part that goes under the radar is active trade management.
Commonly, most traders would rather let their trades swing between profit and losses until either their stop loss or take profit has been hit.
Are you one of these traders? An all or nothing trader?
Well, unless you’ve been through our course, I bet you are.
A lot of traders are only taught about the stop loss and take profit orders to help manage their trades, which is the absolute basics of trade management. And is an absolute sin.
Do you know what the biggest issue with this is?
You miss out on larger wins when you are correct, and you take standardised losses when you are wrong.
The key to trading is not to let trades either hit or fail, profit or loss, based on your original analysis – but to follow the trade actively and manage your position.
I mean, do you know about scaling trades? That’s for another time, again covered in our free course, but if you want to get the best out of your trades – you have to stop being a beginner.
Why is this all relevant to finding out what is a trailing stop in forex?
Because trailing stops is an automated way of active management.
Quite simply, a trailing stop is a stop loss order that follows the market in a profitable direction ONLY.
Therefore, locks in profit as your trade continues to profit in real time.
You have a hard stop loss at 50 pips below the open price.
You also modify, or append to, the same stop loss to trail the markets by 20 pips.
Now what you have told the order to do in plain English is this:
“Every time the market moves 20 pips higher, move my stop loss 20 pips.”
Let’s say a few hours have passed and the market has gone in our favour by 40 pips.
The market will have automatically moved your 50 pip hard stop loss to a 10 pip stop loss, therefore followed the market by 40 pips.
This means, worst case scenario the stop loss will be a loss of 10 pips vs. 50 pips earlier. However, you are still in the trade and have paper unrealised profits of 40 pips.
Another hour passes and it’s up another 40 pips.
Now your stop loss will be at +30 pips profit stop loss, in other words you would have locked in 30 pips minimum now. Whereas the gross position of the trade is 80 pips in the green.
By using a trailing stop loss, it has followed the market to help lower your risk and lock in profit, without you lifting a finger.
Let’s say the markets turned and fell down 50 pips, then your trailing stop loss will have not moved from +30 pips profit. Therefore, you would have been taken out at 30 pips profit.
If you had held on, then the trade would still be open and face a potential further loss of losing 50 pips if you had kept the stop loss at -50 pips.
In this scenario, what would you rather have +30 pips profit or a potential -50 pips loss?
Another scenario a trailing stop loss is useful is to keep a trade open until you a taken out of the market.
You’ve done the analysis of when to enter but getting out of the market by your analysis can leave huge amounts of money on the table.
You can leave your trailing stop loss running without a take profit level and be in a trade for days, weeks, months etc.
Same analysis, same effort, potentially larger rewards by just being active with your trade management.
How to use trailing stop in forex
Be aware, that if you trade on some broker platforms – they do not allow this kind of order on their own platform. Not because it’s illegal or anything, just down to laziness in implementing their platform.
Today we will go through an example using the MT4 platform, which most brokers have available for their clients.
It’s really easy to learn how to use a trailing stop in forex, but can be a hidden feature for beginners so let’s get into it step by step.
NOTE: This works for both market execution and pending orders
Step 1: Make an order
(In this example we are using a demo account to place a trade no analysis has been done).
Step 2: Head down to the Order tab and right click on the SL column
Step 3: With the new menu, selecting Trailing Stop Loss.
It is with this menu you can select a predefined trailing stop loss or select a custom trailing stop loss.
If you select Custom… you are presented with a pop up box and you simply input the value of the trailing stop loss you wish.
Step 4: The trailing stop loss will be implemented successfully and highlighted in the SL column with a yellow cell colour. Now every time the market moves higher by 50 pips, so will the stop loss.
It’s as simple as that.
After reading this article you should be in a much better position to understand what is trailing stop in forex.
Hopefully now you’ll fully understand what is trailing stop in forex! If not, you should certainly read some more of our articles about risk management in our free forex course.
You should understand that this is an active trade management tool that can be easily deployed and that it can save you from locking in profit and protecting your downside as the trade goes on.
The beauty of the trailing stop loss is that it not only allows you to lock in profit but allows you to stay in a trade for a long time (should the markets continue to go in your favour).
Also, now that you have learned how to use trailing stop in forex – you should practice using your trades with it and try and implement it as soon as you can.
Unless, you are happy with manually managing active trades or happy to be a all or nothing trader, either way – I hope this article will help you bank them extra pips!
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