Trailing stops are a more advanced type of stop loss orders that can reduce the risk on your online forex trade as the trade progresses. It does this by adjusting itself to a more favorable rate as a trade moves in a trader’s favor. The basic function of the trailing stop is to increase your profit lock as the market moves without the need for you to intervene and adjust. This allows you to follow trends with a safety you are comfortable with and you don't have to monitor constantly.
The trailing stop is more flexible than a fixed stop loss since it automatically tracks the currency pair price direction and does not have to be manually reset like the fixed stop loss. Like all stop orders the trailing stop enforces trading discipline by taking the emotion out of the “sell” decision thus enabling traders and investors to protect profits and investment capital.
There are two main types of trailing stops that you will encounter; dynamic and fixed-step. The dynamic option is the most common trailing stop order. This will adjust our stop every 0.1 pip that the trade moves in our favor; if a trade goes against you the stop will not move further away. Also it won’t give up any ground it might have gained from a prior positive price move either. It will stay at its high mark until it is triggered or cancelled.
The fixed option is very similar to dynamic except it will trail in fixed increments of pips. When selected there is a 2nd field we can change. This is our fixed amount of pips we want our stops to move. So rather than having a stop trail every 0.1 pips like the dynamic trailing stop we can have it trail every 10 pips, 20 pips or 50 pips, whatever we would like. This results in a slower trailing stop that waits for a certain number of pips to be accrued before moving that amount of pips.
This strategy's advantage is removing emotion from your trading. It's important to set the value when you are calm, focused and able to make a decision based on the information presented on the charts. Also, don't second-guess yourself. You will be well-served to let the trailing stop work by itself. It's important to remember that by combining trailing stops with a stop loss they can protect your portfolio value.