Trailing Stop
Trailing Stop is a Take Profit Order (Profit Lock) that can move according to the price movement.
Trailing Stop is considered a form of Stop Limit Order, but the difference is that this order can move according to the market price moving in the direction of higher profit.
Trailing Stop can be set to a % or number of pips (pips) from the latest market price.
The purpose of Trailing Stop ?
Trailing Stops are designed to protect investors’ profits by allowing profitable trades to continue (Let Profit Run), but at the same time preventing the return of profits from reversals by capturing profits when the price moves against direction.
How to set a Trailing Stop : Setting a Trailing Stop can be done immediately after opening a profitable position. Buy position can only place orders at a price level lower than the current price. But it will not be lower than the entry level. And, Sell position can only be placed at the price level above the current price. But it will not be higher than the entry level.
Tips for Setting Trailing Stop : You should wait for the price to move far from the entry point and then start setting it, it will be better. Because if the price has not moved far from our entry level. The price may move against the short term, hit the Trailing Stop, and then revert to the same direction. will cause investors to lose the opportunity to make a profit.
How the Trailing Stop works:
For example, Robert opens a Buy 1 Lot position on GBPUSD at 1.38709. Subsequently, the price moved up 1.39773. Robert expects the price to continue rising, and then sets a Trailing Stop using the 500-point range condition from current price. So, now the Trailing Stop price is 1.39273 (1.39773 – 500 pips = 1.39273). Later, the market price jumps higher to 1.40550. So, the new Trailing Stop price is 1.40050 (1.40550 – 500 pips = 1.40050). Later, the price moved down to 1.40430. Trailing Stop will remain at 1.40050 and the price continues to move down. until finally reached the price level 1.40050. So, the status is automatically closed.
By this trade, Robert made an estimated profit of 1341$ [(1.40050 – 1.38709) x 1 lot = 1341$ ]
Note: The numbers above are hypothetical for ease of understanding. Investors must include trading commissions and other trading fees.
Advantages – Disadvantages of Trailing Stop ?
The advantage of Trailing Stop is that it saves investors from having to keep an eye on the screen all the time. but still able to maintain profits from trading while being able to allow more profits to continue at the same time. And, it’s better than setting a Stop Order to collect a normal profit (Profit SL), where the price tends to move in the opposite direction until the profit is less than it should be from the farthest distance the price moves.
The disadvantage of Trailing Stop is that sometimes the price tends to move in the opposite direction of our trade until it hits the order and then reverses to the same direction, missing a profitable opportunity.