Trailing Stop
Not all traders are familiar with the useful feature known as a trailing stop. Let’s take a closer look at its function and whether it’s really necessary.A trailing stop is an automatic mechanism for managing a stop-loss order. It is applied to trades that are already open and remains active only while the client terminal is running, as in MT4/MT5. Some platforms, however, allow the trailing stop to be managed directly on the broker’s server, which is undoubtedly much more convenient.
A trailing stop is set at a distance chosen by the trader. Essentially, it is a stop-loss that moves along with the price, maintaining the chosen distance. The trailing stop only moves in the profitable direction of the trade; if the price reverses, it remains in place.
How a Trailing Stop Works
Let’s consider an example.After opening a trade, you can set a trailing stop, for example, at a distance of 20 pips. As long as the price moves in a profitable direction, the trailing stop will adjust the stop-loss to maintain a 20-pip distance from the current price. However, if the price reverses and moves 20 pips against the trade, the position will be closed by the stop-loss.
If the price reverses by less than 20 pips and then resumes moving in a profitable direction, the trailing stop will start adjusting the stop-loss again once the distance between the price and the stop-loss exceeds 20 pips.
Advantages and Disadvantages of a Trailing Stop
The main advantage of a trailing stop is that, during a trending market, it allows you to capture a large portion of the trend. The larger the trailing stop distance, the lower the likelihood of the trade being closed prematurely. However, if the trade is closed, you will lose part of the profit equal to the size of the trailing stop.The main disadvantage is that this feature is almost useless in a flat market.
A trailing stop can be adjusted or removed at any time if needed. Whether to use it on your trades — and how to use it — is entirely up to you.
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