Trailing Stop is very popular with experienced traders in Forex trading. They use Stop Loss to minimize the risk when their predictions are going wrong and Trailing Stop to increase profits as much as possible when they are right. This is the principle to survive and make money in this market.
So what is Trailing Stop? Why is it important to traders? How to use it in trading? All those questions will be answered in this article.
“When you are right, how much profits do you make? On the contrary, when you are wrong, how much do you lose?”
What is Trailing Stop?
Trailing Stop (TS) is a type of stop loss that automatically moves according to price movements in the market. The stop loss will move gradually as the price goes in line with your prediction. But it will stand still when the price goes against what you predict.
You can understand it like this. When you use TS, there will not be a specific take profit (TP) level. The more the price moves in line with the trend, the more you change the Stop Loss level. Until the price changes direction, it will hit that Stop Loss level and your order will close on its own.
For example, you open a BUY order (Stop Loss: 30 pips). If the price increases, you will slowly change the Stop Loss level to the entry point (breakeven), then gradually increase it following the direction of the price. When the price drops and hits your Stop Loss, the BUY order will automatically close.
On the contrary, if you open a SELL trade (Stop loss: 20 pips). The lower the price, the more you move the Stop Loss level down. When the price bounces back and hits Stop Loss, the SELL order will close by itself.
Why do traders love to use Trailing Stop?
In Forex trading, a trader’s account status will fall into the following 5 cases:
(1) Big loss
(2) Small loss
(4) Small win
(5) Big win
With a reasonable Stop loss level, your account will never fall into a big loss. Moreover, when using Trailing Stop, you have more chances to win big. It’s simply because the profit earned will be unlimited with just 1 order you predict correctly.
Assuming that you trade 10 orders and gain 3 losses (the price hits Stop loss), 3 draws, 2 small wins, and 2 big wins. In the end, you’re still the one making quite a lot of profits.
Trailing Stop techniques
There are many techniques for you to use Trailing Stop in Forex trading. But I will only divide them into 2 categories: (1) Active and (2) Automatic.
Active Trailing Stop
You move Stop Loss by yourself when the price moves in line with the trend you have predicted. I’ll give you some practical examples.
Use the Supertrend indicator
Supertrend indicator is quite popular among pro traders. You can go to the Tradingview indicator section to search more about it.
Supertrend is a trend trading indicator. It’s very suitable for Swing Traders, specializing in holding long-term orders. Trailing Stop will overlap with the Supertrend indicator line.
For example, you can see the SELL and BUY orders in the picture above. When the price reverses and touches the indicator, the orders will automatically close.
Use support and resistance levels
Moving the Stop Loss (Trailing Stop) below the support/resistance levels is also a good idea.
For example, in this BUY order, when the price creates a new support zone and goes up, we will change the Stop Loss right below these support zones. Only when the price reverses to break the nearest support, the order will hit Stop Loss and close.
Use the same method to enter and close an order
Let’s say you are using the EMA21 to look for entry points in the market. Then the principle here is closing the order with that same method you use to enter it.
For instance, when the price breaks out of the EMA21 from below, I will open a BUY order. The Stop loss is below the EMA21. After that, the price increases continuously, I will move the Stop loss (Trailing Stop) to follow the EMA21 line. And so on until the market reverses and the price cuts the EMA21 from above and hits Stop loss, the order will automatically close.
Automatic Trailing Stop
This is the special technique on the MT4 trading platform. You will set a fixed number of Trailing Stop levels for each trade. When the price fluctuates, your Stop loss will automatically follow.
For instance, you buy EUR/USD and want to set an automatic 20-pip Trailing Stop. It means if the price goes up 20 pips, your Stop Loss will automatically move up 20 pips. Conversely, if the price drops, the Stop Loss will stand still until the price touches it and the order will automatically close.
First, when the price has run in the right direction, go to MT4 on PC or Laptop (This feature can’t be used on smartphones). Right-click on the EUR/USD order (already profitable), select Trailing Stop, then select Custom.
At the level setting, you can enter the number of points you want. If you want to set a 20-pip TS, you will enter it as 200 points.
Note: If you use the Trailing Stop tool on MT4, your PC/laptop and MT4 software must be active continuously until the order closes to have this function work. If MT4 or your PC/laptop is shut down, slept, or disconnected from the internet, this tool won’t work until your MT4 is active again.
If you don’t still have something unclear or want to ask any questions, please leave a comment below. We’ll reply to you as soon as possible.