What Is A Trailing Stop Loss in Forex?
A trailing stop loss is one of the stop-loss orders that collaborates risk management and trade management. Trailing stops are also called profit-protecting stops because they lock the trader’s profits even as prices fluctuate.
A trailing stop loss is a trading order that locks profits in as the prices move in your favour. As the prices go up, the trailing stop loss drags itself with the price movement and remains where it was pulled when the movement stops, protecting you from losses.
What Is Stop Loss In Forex?
Forex traders use a stop-loss order to limit losses that could come from trade. Whenever there is a possible loss in the trade, the order triggers the close of trade.
In simpler terms, a stop loss is an order the trader gives to the trading company to execute a trade when the market price reaches a certain level. Most forex traders use the order to minimize the losses which are inevitable in forex trading.
Trailing stop and stop-loss orders are similar in that they automatically close trades when the trade moves in an unfavourable direction.
The key feature of these two is that the trigger price always follows the market price as long as it moves in a favourable direction.
How Trailing Stop Loss Works
A trailing stop loss uses the same technique as a regular stop-loss order. When placing the trailing stop order, you put it at a price lower than the trade entry. The trailing stop loss will move as the price moves.
For example, when the price moves 6 points up, the trailing stop loss will also move 6 points up. However, if the price starts falling, the trailing stop loss remains at the point it stopped.
Is Stop Loss A Good Idea In Forex Trading?
Good forex traders research the trading tools before using them. For example, as a forex trader, you should study a currency pair and how viable it is before buying and trading. The traders also know where to get it again if they go short of the forex pair.
Traders use stop loss to ensure they exit the trade as planned. In short, a trailing stop helps traders to lock in the gains and cut losses. This is an advantage to traders who continue to hold onto their stock even after making huge profits.
When trading with a stop loss in forex trading, you benefit from knowing you have an order that will automatically cut your losses. You don’t have to sit at a screen all day looking at the price movement. This order is also a helpful tool for part-time traders.
Techniques For Placing Trailing Stop Loss
Market experts use technical indicators to place a trailing stop loss.
The moving average indicates the average of the past prices and shows it as a line on a chart. Traders use it to identify the trend and filter out any unnecessary distractions. You can use the moving average to trail your stop loss using these steps.
- First, decide on the type of trend you want to undertake: strong, healthy, or weak. The strong trend has the buyers in control and with minimal selling pressures. In a healthy trend, the buyers are also in control, but there is selling pressure. The weak trend has the buyers and sellers all vying for control, and the buyers have a slight advantage.
- Once you know the type of trend to ride, you can now choose the appropriate Moving Average. The two common types are Simple Moving Average (SMA) and Exponential Moving Average (EMA).
- The last step is to exit when the price closes beyond the moving average.
Average True Range Indicator For Significant Trends
An Average True Range indicator would be the best tool to use when setting a volatility-based trailing stop. These steps will help you when using this tool.
- First, decide the Average True Range multiple you will use. You can choose either 3, 4, 5, or a more significant multiple.
- If you are undertaking long-term trends, minus X ATR from the highs to get the trailing stop loss.
- Add X ATR from the lows to get your trailing stop loss if you are on short-term trends.
The Zero Indicator Method
Since an uptrend consists of highs and lows, you can use the swing lows to trail the stop loss. Follow these steps to use this trail stop loss method:
- Identify the previous swing low
- Mark your trailing stop loss just under the swing low identified
- Monitor the price movements. If they close below the marked position, exit the trade.
When marking the stop loss below a swing low, it is essential to note that the market mainly locates stop losses below the swing low.
So, Which Is The Best Strategy For Trailing Stop Loss In Forex?
Although all the three strategies are different, there is no definite best trailing stop strategy. The strategy you choose depends on what you want from your trading. The type of trend, whether short, medium, or long-term, also matters.
Pros And Cons Of Forex Stop Loss
- When using a trailing stop loss in forex trading, your stock will automatically be sold when the share levels drop. This helps you evade losses.
- The order does not limit your profits. Your shares will continue to sell, and you will continue gaining profits as long as the prices stay above the stop loss mark.
- A stop loss is flexible. Use a customized risk management plan to identify your trailing stop percentage. You can also change it to fit your desires.
- Investors do not incur extra costs for placing a trailing stop loss.
- This order gives traders peace of mind as they won’t stay glued on a screen watching how the prices are moving.
- Some brokers do not allow stop-loss orders for specific stocks. You also are not guaranteed to get the price of your stop-loss order.
- It is challenging to trade volatile stocks with stop-loss orders.
- When you get used to the order, you will lose your judging power of whether to sell the stock with the dropping prices.
Be Cautious When Using Trailing Stop Loss Forex
Trailing stops is not very favourable for traders who day trade. With the forex market, currency pairs fluctuate a lot. This makes it challenging to set up a trailing stop.
Although stops are meant to protect your capital, setting them close to the price endangers your account. It will be stopped out over and over.
When putting the stops, always consider your forex trading method, and also, be careful not to set the stops too close to a moving price.
In forex trading, there are only two outcomes: profits, and losses. Every trader wants to make a profit, but the losses are inevitable. A trailing stop loss helps the trader to lock in profits as the prices move in their favour.