What is a Trailing Stop in Forex ?
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What is a Trailing Stop in Forex ?

What is a Trailing Stop in Forex ?

Exit strategies are a vital component of forex trading, which helps restrict and minimize trade loss risk. In fact, the absence of appropriate exit strategies could be catastrophic for an investor. A trailing stop is one such forex exit strategy, which entails moving the stop loss level when a trade progress favorably.

Understanding How a Trailing Stop Works

Trailing stops are often used in conjunction with stop-loss orders. To set up a trailing stop successfully, it is important first to determine a stop loss. A stop-loss order involves setting a dollar amount that is lower than the current trading price of the currency. When the currencys value reaches this specified price, a stop-loss order is activated, and the currency is sold.

A trailing stop also entails setting a stop loss value. However, in this case, the sell stop price is not a dollar amount but is expressed as a percentage lower than the current market price. For instance, the current market price of a currency is $40, on which a 10% trailing stop is determined. In this case, the trailing stop will get activated when the currency's market price reaches $36 ($40 - 10% of $40).

It must be noted that a trailing stop moves in the direction of a price rise. In the above example, if the currency's price increases to $44, a trailing sell stop level will be set at $39.6 ($44 - 10% of $44). It must also be noted that a trailing stop only goes up and does not follow a price if it falls.

Feasibility of a Trailing Stop

Determining the feasibility of a trailing stop and other forex exit strategies is an intricate task, which will depend on your desired level of risk-return payoff. Broadly speaking, a trailing stop is a better exit strategy than a stop loss, offering scope for higher profitability.

However, you will only be able to optimize your forex trading systems when the percentage of a trailing is wide enough to counter the effects of random noise and normal fluctuations in the market.

The promotion is published here only for an informative purpose, THIS IS NOT FINANCIAL ADVICE!
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