As traders, we have many strategies and tools that we can use to assist us with protecting our profits (and of course, our capital) and limiting any potential loss. One such tool is the Trailing Stop Loss, and we highly recommend that you utilize this tool to incrementally lock in your profits as your trade progresses.
A Trailing Stop Loss, sometimes called simply a Trail Stop, is a Stop Loss order that is placed above or below the market price in the same way as a standard Stop Loss. However, in contrast to a usually fixed or static Stop Loss, your Trailing Stop is continuously adjusted as the market price of your chosen asset moves in your favor.
Your broker will allow you to place an automatic Trailing Stop Loss Order that will automatically trail the prevailing price by an amount that you specify. Hence in the case of a BUY, if price moves up 10 pips, your Trail Stop will also move up by 10 pips or whatever amount you have pre-set. For every 10 pips that price moves, you are therefore locking in another 10 pips of guaranteed profit.
If price stops moving up, or reverses then your Trail Stop ceases moving up and stays in the same place. If price reverses enough so as to meet and trigger your Trail Stop then you are automatically exited out of the trade. However, the good thing about the Trail Stop is having moved up somewhat, you have exited with some of your profits intact.
Benefits of Setting a Trailing Stop Loss
– Removes indecision about when to exit your trade.
– Takes emotion out of the equation and enables you to stick with your predefined trading rules
– There is no ceiling on your profits. If price continues to rise, so does your Trail Stop
– In the case of an automatic Trail Stop there is no need to ‘babysit’ your trades. Set your parameters and walk away.
– It’s flexible.. You can adjust your Stop Loss at any time during the trade.
You can also manage your Trail Stop manually. Here’s how..
Manual Trail Stop Management
The first thing you will want to do is adjust your Stop Loss to breakeven (your entry price) as soon as possible. At this point you can relax as you have protected your capital and you are in your trade for zero risk.
The point at which you adjust your Stop Loss to your breakeven point is entirely up to you, but a good rule of thumb is to do so when your trade reaches +20 pips. That way there is a comfortable enough gap between the current price and your newly adjusted Stop Loss. This reduces your chances of getting stopped out of the trade too early before it’s had a chance to progress.
Again the point at which you continue to move your Stop Loss to start trailing the current market price is up to you but we suggest moving it up (in the case of a BUY) 10 pips for every 10 pip gain.
One of three things will happen to exit the trade.
– you’ll either exit the trade manually, or
– price will hit your Take Profit, or
– price will reverse to the extent that it hits your Trail Stop level and exits your trade.
One of the most difficult things in trading is to know when to exit the trade and take your hard earned profit off the table. Inevitably, we can exit prematurely and we can exit too late, with both potentially having an adverse effect on our bottom line. Using a Trail Stop is therefore a smart decision for you to walk away with good profits.
BONUS – Trailing Stop Expert Advisor to manage your trades
If you are a Slick Trade Sapphire Member and prefer manual entry for your trades, then you have access to the TrailingStop Expert Advisor with settings to control all open trades in your account, or only ones that have the EA attached to the chart. We hope this helps to enhance the quality of your trading experience. CLICK HERE for access