Online brokers offer various types of orders designed to protect investors from significant losses. Many traders have heard of the truism, 'cut your losses short, and let your profits run. However, if you are unfamiliar with a tool to help you implement this tried and true wisdom, it's time to familiarize yourself with the Trailing Stop. Trailing stops are a more advanced type of stop loss order that can reduce the risk on your trade as the trade progresses.
Trailing stop is an order which major function is an automatic maintenance of open position with permanent shifting of stop loss level depending on price movement. When a Trailing Stop is placed, the level of the stop loss will change along with price movement. If you open a buy position, and the price of the instrument increases by a certain number of points, with a Trailing Stop the level of the stop loss will increase as well. If you open a sell position and the price of the instrument falls, a Trailing Stop order will cause the level of the stop order to decrease as well.
A trailing stop can be set at a defined percentage away from a currency pair’s current market value. In case an investor enters into a long position, the trailing stop needs to be set below the currency pair’s current market value. In case an investor decides to enter into a short position, the trailing stop needs to be set above the currency pair’s current market value. This stop is usually used in order to secure what has been gained by enabling the trade to remain open and continue gaining as long as the value of the currency pair is moving in the right direction.
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. This will adjust our stop every 0.1 pip that the trade moves in our favor. For example, let’s say we set our dynamic stop initially at -10 pips and then the trade moves in our favor 1 pip. Our stop would move 1 pip from -10 pips to -9 pips. The further the trade moves in your favor, the further our stop will move, pip for pip (actually, to be more exact, it will move in 0.1 pip increments).
The fixed option is very similar to dynamic, except it will only 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 stop to move. So rather than having a stop trail every 0.1 pips like the dynamic trialing stop, we can have it trail every 10 pips, 20 pips, 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.