Trailing Stop: How to Reduce Losses and Maximise Profits

Trailing Stop: How to Reduce Losses and Maximise Profits

Just what is a Trailing Stop and how can a trader use it? In the world of trading, there are so many factors involved in making a profitable trade. Newbie online traders often spend a lot of time researching how to make more money, but this is only half the battle. Rarely do they bother to explore strategies for losing less. News outlets and trading forums are all so busy telling us what to trade. Then there are the countless blogs showing you how to read an Economic Calendar and get in on the action, but how many are telling you how to get out of a trade at the best time?

Which brings us to Take Profit, Stop Loss, and the often overlooked Trailing Stop. These user-friendly tools are incredibly powerful, flexible, and free to everyone and anyone who chooses to sign up for a trading account.

Whenever you make a trade, you no doubt assume your order has been set in the right direction. For example, with a buy order, the expectation is that the price will go up. That’s opening the order. Easy! But with both profit and loss, the question of when to close the order is a common dilemma that causes trouble for most people.

Closing the order is where emotions can interrupt your trading strategies. A common manifestation is a fear that you could lose what you’ve just earned. Greed might also surface from time to time, as “just a little more” echoes in your head. It’s happened to all of us at some point, and on occasion with painful consequences. One solution is to use pending orders. Stop Loss and Take Profit can reduce the complications of when to close an order, but they are not always the best options. Let’s see why.

Take Profit

It’s a fundamental action that is presented to a trader at execution. Let’s say you set a buy order, and you believe it will reach a certain height before reversing and falling. By setting a Take Profit, you’ll get the result you wanted if the price rises as expected, but what if the price continues to rise far beyond your expectations before the eventual reversal? Instead of making a killing from a hot moving instrument, you’ve made a tidy or conservative profit, and now you’re wishing you’d aimed a little higher.

Incredible price moves don’t happen every day, and if you’ve chosen the right direction on your trade, you really should be hoping to make the most of it. A Take Profit order does not offer that.

Stop Loss

You’re trading a volatile pair that is known for dramatic highs and lows. You execute your buy order with the expectation of a rise, but price drops can be significant and your whole day’s trading budget can be wiped out in minutes. So you set your Stop Loss to a value you are willing to swallow. But let’s say you set it conservatively. The market wildly fluctuates for just a moment, activates your Stop Loss and closes the order, and then rises to new heights. Once again, you’ve missed out on an amazing opportunity. So what’s the solution?

Trailing Stop

A Trailing Stop is an excellent way to manage risk and optimize profits. If you set a buy order with a Trailing Stop, the on-screen line at which the trade will close is not static like a standard Stop Loss. It will rise along with the price. When the price falls, the Trailing Stop will not fall. In the example below, the Trailing Stop is set at 200 points.

what is trailing stop

  1. You set a buying trade when the price is 1.5000.
  2. The price rises to 1.7000. Your Trailing Stop rises to 1.5000.
  3. The price falls to 1.6500. Your Trailing Stop remains at 1.5000.
  4. The fall reverses and price rises to 1.9000. Your Trailing Stop rises to 1.7000.
  5. The price rapidly falls to 1.5500. Your order is closed as the falling price passes 1.7000.

So your order closes at the highest point that the Trailing Stop reached. If you’d set the Trailing Stop at 50 points, your order would have closed on line 3 (1.6500) seen above.

When can a Trailing Stop fail?

A Trailing Stop is a tool, and it needs to be used correctly to yield the best results. If a Trailing Stop is set too conservatively, a small downward price shift will trigger it and cut short your order before anything significant can happen. Another problem might occur if you simply choose the wrong direction from the start. In this case, a Trailing Stop is completely useless.

How to set a Trailing Stop

In MT4 or MT5, right-click on any of the active orders that are running in your terminal at the bottom of the screen. You’ll immediately see the Trailing Stop option on the menu. You’ll be required to set the distance of the Trailing Stop. Options are offered in point value, but you can customize if you have something specific in mind. Be sure that your chosen value is not within the broker’s spread, or the order will fail. It’s that easy.

Trading tips for Trailing Stop

A Trailing Stop should not be influenced by your financial goals or gut instinct. One trick is to use the size of the broker’s spread as a reference. If you want to go bigger than this narrow band, you might consider the volatility of the symbol in question. The greater the volatility, the wider the Trailing Stop.

In addition, by activating a Trailing Stop, you have the freedom to set a very optimistic Take Profit. If the price does rocket to unexpected highs, you’ll get the big payday. If the price gets close but falls short, the Trailing Stop will close the order not far from the best price.

The one downside to the trailing Stop is that it is only active while your computer is switched on. If you wish to trade over a period of days, you must leave your PC running the whole time. Exness offers a way for you to solve this restriction, though.

Thanks to a VPS (virtual private server), Exness traders can use a server that is situated near the company’s main transaction hub. This allows traders to maintain long-term orders with Trailing Stops, but it also offers fast execution and even greater security.

If you’d like to try trading with a Trailing Stop, we recommend you sign up with Exness and apply for the free VPS service. When it comes to buying and selling, never follow the advice of anyone without carefully researching for yourself. Review, investigate, test, and then make an informed decision based on your own conclusions.

 

Get your trading career off to a good start

SET UP AN EXNESS ACCOUNT HERE

Your 4-step guide to opening a trading account

 

Step 1: Getting registered

It's very easy to open an account with Exness. Click here to open the sign-up page in a new tab. If you want to get everything done in the next 10 minutes, be sure to have a credit card, ID, and, proof of address by your side. You can choose to open a demo account without these things. Either way, everything you need to know is here in this two-minute video. Pause the video as you go through the first three steps.

Tip: Account type depends on the amount you wish to deposit. Leverage is effectively an interest-free loan that the broker offers. It allows you to make a large investment from a small deposit. If you are looking for high profit with high risk, a higher leverage might be right for you. If you prefer slow-burning safety with lower results, then keep your leverage low. You can never lose more than you have, but higher leverage means faster results... both good and bad.

Step 2: Prove who you are

Exness takes security very seriously, and they check every client signing up. Just like opening a bank account, you'll need to prove who you are before getting access to the global markets. Watch this one-minute video to see how.

Tip: While you're waiting for your real account to be approved, open up a demo account and start getting to know the trading platform.

 

Step 3: how to get access to the market

Trades are made using the award-winning MT4 trading platform. Inside the box of the demo or real account you'll see a gear cog. Click the gear cog to make a deposit. Use the passwords provided in the email. Click the gear cog again and select SIGN IN TO MT4 WEBTERMINAL then follow this one-minute video. You're about to make your first virtual trade on the real markets.

 

Step 4: making a trade

As a default, the top currency pair on the list will have an open chart. Right click on the chart and select the “close” option.

As a professional trader, selecting the right pair requires some research. For a first-time test, any pair will be sufficient. Drag a pair from the list of currencies on the left side of the trading terminal. The old saying goes, “what goes up, must come down.” Obviously, this principle goes the other way too. Your mission is to find a moment when the price direction is going to swing or reverse. If you feel the price is about to go up (bullish), then BUY, if it looks like it’s been trading high and the price has started a downward (bearish) trend, then SELL.

Open a trade

There are many ways to open your trade. You can select from the buy and sell options on the top left of the chart. Preferably, double-click the currency pair on the list. Right click on the chart when you’re ready to make your first trade. Time to set the volume depending on how confident you are in the direction you are forecasting. This is the perfect time to set your stop loss and take profit. Click the arrow to the right of the stop loss and take profit prices.

Note how the blue and dark red lines in the popup graph sit above and below the buy(ask) and sell(bid) price. In the example, we traded long (buy) and got a message confirming the order was successful. If you get an error, your volume was too high for your balance, or your stop loss/take profit was too close to the spread. Remember, every order starts as a negative because of the spread. Be patient. Your take profit will activate when the time is right, and your stop loss is protecting you. To close an order, you have three options. Click the X on the right or right-click the order. If you double click the order, you can close or modify the order.

Congratulations!

You now know how to make a trade. Forex trading can be an exciting way to spend your free time, and you'll actually learn some real-world skills that will serve you well throughout your lifetime. Be patient, learn, and who knows, you might one day be one of the lucky few full-time traders. How will you spend your day?

 

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This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation.
This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the article. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles. Please note that past performance of an asset is not a reliable indicator of future results.