A trailing stop is an order that automatically adjusts its level according to the forex market price fluctuations. If you enter into a trade and the market starts to move in your direction, your stop loss will also move along with it. It is similar to stop loss order which would remain at a fixed level regardless of how much the market moves.
Trailing stop orders are a common and effective downside protection mechanism for forex traders. They help limit losses by ensuring that trades are only executed at prices that are favorable to the trader.
Why Forex Traders use Trailing-Stop Orders
There are several advantages but the main idea is to lock in profits.
Secondly, they can help reduce risk by automatically adjusting your stop loss level as the market fluctuates.
Finally, using it can take some of the emotion out of trading by removing the need for you to manually adjust your orders as prices move around.
If a trader does not use a trailing stop, Forex trading can become non-profitable. If the market price falls below the stop price, the trade is closed and a loss is incurred. So this is a kind of way of protecting traders’ profits. But note that this is not a guarantee of your success. There is much more to consider including the lowest spread broker for forex, commissions, market trends etc.
How You Can Use Trailing Stops To Trade FX Effectively
- First, always base your trailing stop on recent swing highs or lows.
- Second, give yourself enough room so that small fluctuations in prices don’t trigger false positives.
- Finally, adjust the stop as needed based on how active or volatile the markets are behaving.
Another way to effectively manage risk is by using a combination of trailing stops and stop-loss orders. A stop-loss order, on the other hand, is a static order that will close out your position at a predetermined price if the market moves against you. By combining these two types of orders, you can have dynamic protection against losses while still being able to capture profits as they occur.
One such occasion is when the market is highly volatile and prices are moving erratically. In these conditions, it is difficult for traders to accurately predict where the market will move next, so using a trailing-stops may cause them to miss out on potential profits or incur greater losses than they would have otherwise.
Another time when it might not be ideal to use it are periods of low liquidity in the market. This can often occur around holidays or weekends when trading activity tends to be lower than usual. If there isn’t enough activity in the market, prices may not move as much as they typically do, making it more difficult for traders to generate profits using this strategy.
Finally, some traders simply prefer not to use this type of orders at all due to their personal trading style or risk tolerance level.