What is a Trailing Stop in Forex Trading?

A trailing stop is a type of order designed to lock in profits or limit losses as a trade moves favorably. The trailing stop only moves if the price moves in the desired direction. Once it moves to secure a profit or reduce a loss, it won't back down in the other direction. It is a popular tool used by traders to manage their risk.The trailing stop is placed in an open position, at a specific distance from the current price of the financial instrument in question.

This distance is measured in points. The main purpose of the trailing stop is to secure any potential profits. If the market continues to move in the profitable direction, so will the trailing stop, always keeping the stop loss at a pre-selected point distance from the current price.If the market stops moving in the profitable direction, the trailing stop keeps the stop loss fixed. If the market goes against the profitable direction, it could eventually reach the stop loss level pre-set by trailing stop.

Once the price reaches this level, the position is closed.A trailing stop is similar to a stop-loss order for trading. Like a classic stop loss, its objective is to close a trade in case of a market reversal. It is an essential tool for managing risks, such as limiting losses. But what's the difference between a stop loss and a trailing stop?The key difference between them is that while a classic stop loss sets the stop level at a certain price, a trailing stop sets it at a certain distance from the current market price.

This allows traders to lock in profits and reduce losses when the price of the symbol moves in an unprofitable direction. If the position becomes profitable, they can manually change their stop loss to a breakeven level.To automate this process, traders use trailing stops. This tool is especially useful when the price changes strongly in one direction or when it is impossible to observe the market continuously for some reason. Let's look at an example of how to use a trailing stop in Forex trading to help us understand how it works.Suppose that the DAX 40 reaches a maximum of 12,590 points before retreating; its trailing stop would have moved to 12,540 points and would be activated if the market had fallen below this price.

Trailing stops are always associated with an open position and work on the client's terminal, not on the server like Stop Loss orders.Another variant of using Fibonacci retracement levels is to use the number of points between level 0 and the first retracement level of 23.6 as the number of pips for the trailing stop. For intraday traders and swing traders, this allows them to study new charts and look for new opportunities while knowing that risk is under control in their open positions.In foreign exchange trading, since currency prices tend to move in small increments, they are quoted in a standardized unit. Using Fibonacci retracements to determine the number of pips in a trailing stop is primarily intended for traders who reverse trends. To define the number of pips of this type of order, you can take the distance between prices of last support (if you want to open a buy trade) and last resistance reached (if you want to go short).A trailing stop can be beneficial for traders who may not have enough discipline to secure profits or reduce losses.

It allows them flexibility since they don't have to move their stops manually if their position moves in their favor and they want to adjust their exposure accordingly. When prices rise, it carries their trailing stops with it but when prices stop rising, their stops remain at their dragged level.

Julia Harbough
Julia Harbough

Lifelong beer maven. Typical coffee buff. Lifelong travel guru. Lifelong beer expert. Web scholar.

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