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Trailing Stop

Discussion in 'Traders Glossary' started by Pharaoh, Jun 30, 2008.

  1. Pharaoh

    Pharaoh 1st Lieutenant

    Oct 3, 2007
    Likes Received:
    A special form of stop loss. Exactly how this works varies some between trading platforms. For MT4, setting a trailing stop means that if a trade moved into profit by as many pips as the trailing stop, then a stoploss is set (or pre-existing stop loss is adjusted) to stay a certain number of pips behind the best price in your favor. This can be used as a way to manage a trade and try to get more profit out of it without having to personally monitor it. Do note that for MT4, trailing stops are managed from your computer, not your brokerage's server. This means that if you turn off MT4 or your computer loses it's connection to the broker, the stop loss will not be adjusted any more.

    Example: You open a trade with a 30 pip stop loss. Things go well and the trade moves 20 pips into profit. You set a 25 pip trailing stoploss. The moment the trade hits 26 pips profit, the stoploss moves to 1 pip in profit (might be 25 pips/0 profit - I never watched it closely enough to be sure).

    If the trade goes to 30 pips profit, the stop trails up to 5 pips profit. If the trend reverses and the price moves the other way, the stop does not move unless it is hit (closing your trade at +5 pips automatically) or the price again moves farther in your favor (moving the trailing stoploss in your favor).

    Using a trailing stop loss is an excellent idea if you set the stop wide enough that it doesn't get taken out by random noise in the market. Using a stop loss is a bad idea if the market suddenly goes against you and you give away the entire width of the trailing stoploss. Figuring out which of these is going prove true on a particular trade isn't easy.





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