Trailing stops let forex traders lock-in profits as well as reduce the overall risks of trades as they advance. A trailing stop protects profits by allowing a winning trade to remain how do trailing stops work in forex for as long as possible. By choosing the right stop parameters, your mechanical trading system can manage trailing stops to maximize profits in any forex market.
Trailing stops can ensure that you’re able to stay in volatile-yet-winning trades long enough to escape with some profit. For every pip that a well-designed trailing stop algorithm saves in avoiding premature stop-outs, a savvy trader can earn even more from price moves on volatility, as the trade continues favorably onward. If you’re seeking better trading profits, it’s worthwhile to look at some ideas about how to develop a stop-loss and trailing-stop protocol that fits your own market, trading system and style. A stop order is a type of conditional order which is executed once the currency reaches a specified stop price. A stop-loss or trailing stop order for a long forex position is set below the current market price. The stop for a short position is set above the current price.
Stops can be calculated and set at either a predetermined percentage or number of pips away from the current price. In most marketplaces, a stop order guarantees an exit from the currency holding if the trigger price is touched, yet it doesn’t guarantee the actual fill price for that order when it’s executed. Once the marketplace has traded at the stop price, that is, once the stop price is touched, the stop order becomes a market order to be filled at current price at the time when the order was triggered. If the stop price is touched and the stop order changes to a market order, the trader is assured that the trade will be executed, but the exact price obtained at execution can vary according to liquidity, order size and other factors. Usually, the tighter the order is filled, the better the trade outcome.
After the initial stop-loss order has been set and then superseded by a favorable price move, the stop price for the pending exit order is adjusted to a more favorable price as the trade continues to move in the trader’s favor. This creates a trailing price at which the order will be executed, hence the name. The trading system automatically adjusts the stop, changing its function from minimizing losses to protecting gains as the currency price continues to move favorably away from the entry point. The greatest benefit of a trailing stop is that it allows the trader to specify the amount of risk for a particular trade, while estimating the potential upside. Dynamic trailing stops are the type most commonly used in forex trading.