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Chapter 5, Part V. Order types in FOREX Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Special case of Stop order type –Trailing Stop Order

    A trailing stop order is another type of stop loss. The major feature of a trailing stop is that it trailing (i.e. follows) your position only in the positive direction of reducing the potential losses. It means that for Long positions it could follow the price only in up direction, for short positions – only in down direction. A trailing stop order never can lead to increasing the potential loss. Also it could be used for conservative protection of existing profit. It will be easier understand on particular example:

    Let’s assume that you have entered on the long side of the market, say, on EUR/USD at 1.3040. Initially, you intend to place stop loss order at 1.2990, i.e. 50 pips lower. You may do this with Trailing stop order. Trailing stop places in terms of pips of your potential loss. It calls “Trailing” because it follows the market price at the same distance, that you’ve placed it. In our case this distance is 50 pips below the market. But, as I said, it moves only in the direction of reducing your potential loss.



    If market price will increase to 1.31 your stop will automatically move (follow the market) to 1.3050 – the distance of 50 pips holds unchanged. But if then, market will move lower to, say, 1.3060 – stop loss will stay at the same 1.3050. If market starts move down right after the moment of your entering, and moves from 1.3040 directly to 1.3020 – your trailing stop will be also the same – 1.2990.

    Remember, Trailing stop never could be lower than initial level that it has been placed at. Trailing stop follows the market at fixed distance, that you’ve initially set, but only in direction of reducing your potential losses relatively to the entry price on your position.

    Trailing stop, in fact, after some time could reach the level that is higher, than your position has been opened at. In this case, trailing stop is some kind of conservative take profit order. Not in terms of nature, but in terms of function. For example, if market will reach 1.3200 area, than your trailing stop will appear at 1.3150, although the initial position was opened at 1.3040. See, if market will move down and hit 1.3150 area – you will get profit although this is Trailing stop order.

    NOTE: MT4 trailing stops don't engage until your position's profit is at least equal to the amount of your trailing stop. For example, if you set a 20 pip trailing stop, your position must be at least 20 pips in profit before this feature starts to move your stop. This means that you should set an initial stop loss when opening the trade and not count on the trailing stop to protect you if the trade immediately goes against you.

    Look at the picture, what it looks like in your trading terminal:
    [​IMG]
     
    Nachoga and fran alvarez like this.
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