What is Trailing Stop? How to set it up?
On trading platforms, you will see various types of pending orders available.
Every platform has an advanced pending order option such as the “Trailing Stop”.
When you see “Trailing Stop Loss”, you can check to enable the Trailing Stop order.
The Trailing Stop is a Stop Loss that automatically updates every time the price of the position moves in your favor.
This is a handy tool if you initially have underappreciated the market. Trailing Stop Loss never readjusts if the market moves against you.
A trailing stop can be set to become active after the market moves by a predefined number of pips at which point it will begin to follow the market price, always remaining within a certain number of pips from the current price.
Trailing Stop Order when the platform is offline
On MT4 and MT5 platforms, you can set up “Trailing Stop” orders only when the account is connected to the server. If the server is disconnected even a moment or you logged out from the account, then the “Trailing Stop” order will be disabled.
Even though the order type is an automated stop loss, you need to keep the platform opened constantly just like when you run EAs (Expert Advisers).
To solve this problem, cTrader has introduced a “Trailing Stop” order that works even the platform is offline.
With this new feature, you can set up a “Trailing Stop” order and close the terminal. You can make sure that the order will be closed with the maximum profit possible (if the market price moves in your favor) even if you are not there to monitor it.
cTrader with such advanced functions, is now available with FXPro, a leading Forex broker based in Cyprus.
How to set a Trailing Stop?
The well-known Stop Loss and Take Profit orders allow you to control the trading process, fixing losses and profits at predetermined levels.
However, when the price moves in a profitable direction, you can manually move the Stop Loss in the direction of increasing profits in order to bring the trade to a breakeven level in case the price suddenly moves in the opposite direction.
The trading platforms like MT4 and cTrader allow you to automate the process of moving Stop Loss in the direction of increasing profits by using the Trailing Stop option.
Why you should use the trailing stop?
When using Trailing Stop, a trader can automatically place a Stop Loss order as soon as the price reaches a certain level of profitability.
Moreover, this order will follow the price in a profitable direction at a given distance.
With each new quote, the trading platform checks its value, and if the profit has reached the specified level, the program places a Stop Loss.
Then, with each new price value, the following happens: if the price continues to grow, then Stop Loss is moved by the program by a specified number of points from the price.
If the price reversed in a loss-making direction, then Stop Loss remains at the same level, so the transaction can be completed at Stop Loss, but already at a breakeven level.
The following scheme operates in the Trailing Stop mechanism:
Profit reaches the value of Trailing Stop — an instruction to set Stop Loss is sent to the server from the trading terminal.
Stop Loss is automatically set in the trade.
Quotes have exceeded the Trailing Stop value (for example, by 1 pip) — a request is sent to the server to move Stop Loss by 1 pip from the previous value.
The price turned in the opposite direction – Stop Loss does not move and remains at the same level.
If the price reaches Stop Loss, then the deal is closed, and the profit is fixed on the account.
If profit never reached the value of Trailing Stop after the opening of the transaction – Stop Loss is not automatically set, the transaction is not protected from losses.
How to set trailing stop efficiently?
Setting a Trailing Stop in the trading platform is not difficult at all.
First you need to open a trade for which you need to set up this order.
Once a trade is opened, right-click on an open trade order and then select Trailing Stop. This will allow you to assign a value, upon reaching which Stop Loss will be set automatically.
Please note that in order to avoid losses due to a strong losing movement, it is better to limit losses by manually setting Stop Loss in advance.
As soon as the profit reaches the designated value (in this case, 15 points of profit), Stop Loss will be automatically moved by the program to the breakeven level.
If the profit continues to grow, then the order will automatically follow at a distance of 15 points from the price.
When Stop Loss is assigned manually, but Trailing Stop is also assigned, then its value in the terminal window will be highlighted in yellow.
You can choose the Trailing Stop value at the level of 15 points. A larger value can be selected from the drop-down list, and if necessary, enter it yourself:
To do this, call the Trailing Stop settings by clicking the right mouse button and select “Set Level”.
After that, a window will open in which you can enter any desired value, but not less than 15 points.
Each trader selects the Trailing Stop value individually, according to his own trading system.
In the drop-down window, along with the “Set level” item, you can also see the “Delete all levels” item (allows you to simultaneously disable all assigned Trailing Stops for all open positions and pending orders).
What else you need to know about Trailing Stop?
To get the maximum benefit and effective return in trading when using Trailing Stop, you need to take into account the following practical points:
- Trailing Stop is selected individually for the trading conditions of each trader. Its value directly depends on the type of currency pair used by the trader. More volatile pairs have a larger correction value. Normally, it is necessary to set a larger Trailing Stop. Why is this needed? This is necessary in order to avoid premature breakeven triggering, since a closely spaced Stop Loss often leads to closing the trade, and then the price continues to move in a profitable direction.
- In the case of MT4, the Trailing Stop is processed exclusively, and not on the company’s server. For example, the standard Stop Loss and Take Profit, which the trader sets himself, are fixed on the company’s server. This means that if the trader turns off the trading terminal, the orders will still work. For Trailing Stop, this statement is only partially true. Trailing Stop will only work when the trading platform is enabled. If the program is turned off, then only the last value of the automatically set Stop Loss will be recorded on the server, which will work if necessary. But the Stop Loss itself will no longer move, following at a given distance from the price.
- Trailing Stop works well with dynamic explosive price impulses. In these cases, price corrections can also be observed on the market, but their value is relatively small compared to the impulses and not enough to automatically hit the Stop Loss that follows the price. This is relevant for strong trend impulses or during news releases, when there is a price surge without a retracement. But even in these cases, too small Stop Loss will not allow you to get the maximum profit, as it will lead to premature closing of the transaction.
- When planning to use a Trailing Stop and opening a trade, set the initial Stop Loss manually to the value that you think is acceptable and safe. Subsequently, when the Trailing Stop is triggered and the Stop Loss is set automatically, your Stop Loss will be cancelled. But this will only be in the case of a profitable price movement for you. If Stop Loss is not set manually, and the transaction moves in a losing direction, then there will be no protection against losses that would stop the loss of funds on the account.
Thus, the use of Trailing Stop is not a guarantee of profit.
It will bring benefits only with its proper use, and this is possible only if the trader has a certain experience.
Trailing Stop is not appropriate in every situation.
For example, in a flat market price movement, it will bring the trader either losses or only a small profit, since the price will move in a certain price range and constantly return to the place where the transaction was opened.