Forex beginners who do not have much experience always want to know how to trade forex without missing the chances of taking profit and limit losses at the same time. We all know that taking profits when the market is at its peak and limiting losses within the tolerance limits of traders is an important strategy in trading forex successfully. Forex beginners who do not have much experience in forex trading or who are yet to remove all emotional decisions tend to miss chances of taking profits or limiting losses; this can be overcome by a specific order type – trailing stops. Although the principles can be applied to a more experienced trader, I will introduce trailing stops used in trading focusing more for forex for beginners.
What is a trailing stop?
A trailing stop is a type of stop loss order that combines elements of both risk management and trade management. Trailing stops is also known as profit protecting stops, because it is a dynamic order that closes trades at progressively better prices in order to lock in profit while preventing losses when the price is moving in an undesirable direction.
How to trade forex with trailing stops?
After having an idea of what is a trailing stop, forex traders should know how to trade forex with trailing stops. Trailing stop works similarly with regular stop loss. The main difference between a regular stop loss and a trailing stop is that the trailing stop automatically move as the price moves. Let’s take a look at the following example in order to understand trailing stops clearly. For example, if a trader buys the EUR/USD pair, he wants to limit losses when the price goes against his expectation and he also wish to lock in gains if the price moves in a favorable direction. In order to accomplish this, he can place trailing stop. If he places the trailing stops in order to trail the market price by 30 pips, it will actually follow the price dynamically by 30 pips if and only if the market is moving in positive direction. It is important for forex beginners to remember that trailing stops only move in the direction that favors the trader. What if the price moves against the traders’ position? The Trailing stop will not move if the price moves against the traders’ position. When the price decreases by 30 pips, it will therefore trigger the trailing stop and will automatically close the trade.
How to trade forex with trailing stop properly without mistakes?
Trailing stop is quite helpful to traders who cannot discipline themselves well. But there are always mistakes made by forex beginners when they trade with trailing stop. One of the mistakes that novice traders often make is to place a trailing stop that is too close to the current price (e.g. a one or two pip trailing stop). We know that if a trailing stop is too close, it is very likely that the trailing stop will trigger, which leaves traders little room for profits. So how should one trade forex with trailing stop properly? Trailing stops should be placed at a distance from the current price. For example, a market that usually fluctuates within ten pips while it is still moving in a single direction would need a trailing stop that was larger than ten pips, but not too large to be realistic.