In trading, one of the most difficult decisions that we face is when to cut our losses or take profits.
You might have a winning trade that has already accumulated some pips but then, you start worrying whether the market will reverse. On the other hand, you might be in a losing trade and you start wondering whether you should cut the trade or hold it, hoping it will recover and go your way.
Both of these scenarios have been known to hurt traders. Luckily for us, there are tools in Mitrade trading platform that can help minimize such emotional dilemmas. One is trailing stop loss order.
We are going to see how a trailing stop order can protect your profits and improve your trading.
Well, our keyword for today has two important parts to it: “Stop Loss”, and “Trailing.”
A stop loss, as we know it, is a market order that automatically cuts our losing trades when they reach a predetermined level. However, to“trail” means to follow something closely. Therefore, a trailing stop loss is a special type of stop loss in that it follows the price as it moves higher or lower.
In short, unlike the fix points stop loss that stop loss in the same place, a trailing stop loss order will move. The system will reset our stop loss with the latest price movements.
►Examples1: Trailing stop 15%
After entering the market, the stock price falls almost in a straight line
The share price fell to hit –15%.
At this point, whether you set a traditional stop loss or a trailing stop loss of 15%, both are stopped at 15%. So trailing stop is equal to a traditional stop loss.
►Examples2: Trailing stop 15%
After entering the market, the stock price sprayed sharply. If the stock price rose sharply by 50%! However, after that, the momentum of the stock price began to weaken, and it fell back to the starting point...
At this point, if you set a traditional stop loss, you can only watch the $ float away again.
And if you set the trailing stop loss -15% strategy, it will be triggered when the price drops 15% from +50%. That is, we can make a profit at +35% in the uptrends!
You see a trailing stop order usually works to protect already-won profits from being absorbed back into the market.
Do you understand now?
Trailing stop loss N% = Stop loss exits when the stock price falls N% from the high
Well, you can check out Mitrade platform and see how simple it is to use the trailing stop.
A trader use trailing stops when:
● Understands trends and trades in their direction
● Agrees that one cannot win all the pips in a trend
● Knows that losses are normal in trading
● Knows when a trend has ended, so they exit their trades
● Gets satisfied when the market hits their stop loss or trailing stop-loss order
Professional traders use trailing stop loss orders to ride trends. They know that if a trend is genuine, it will keep rising and falling without breaking past highs or lows. As such, their trailing stop loss orders will keep booking profits without getting stopped out. Eventually, they know the trends will reverse; and that is when the stop loss will get executed and their trades closed.
In this scenario, a real trader will accept their tiny profits and start looking for new opportunities. A confused trader will start cursing the market or the trailing stop loss order.
Below is an example of how a pro trader might use a trailing stop loss order to ride a trend.
Point 1: At this point, the trader identified that a downtrend had occurred, so they opened a sell trade.
Let’s assume that they set their trailing stop loss order to be 40 pips. This means that after they have 80 pips of profit, the trailing stop loss will lock in 40 pips. Let’s also assume that the distance from point 1 to point 2 is 40 pips.
Point 2: So, when the price moved from 1 to 2, nothing happened because 80 pips had not been made.
Point 3: When the price moved to point 3, the trader had won their 80 pips. Therefore, the trailing stop loss would have been automatically set at point 2.
So, if the market had reversed, the trade would have been closed at point 2 and the trader would still keep their 40 pips profit.
Point 4: Luckily for the trader, the trend kept going lower. When it got to point 4, the trailing stop loss order would have moved from point 2 to 3. This time, the trader would have 80 pips locked.
In case the price reversed, the trade would have been automatically closed at point 3 with a profit of 80 pips.
Point 5: The market kept going in favor of our trader, sinking another 40 pips. The trailing stop loss order would have moved from point 3 to 4, in it, booking 120 pips for the trader.
At this point, the trader would know that they have a guaranteed 120 pips no matter what happened.
Point 6: As fate would have it, the market tried to get lower past level 5.
It sunk a little then began reversing. Since it did not move another 40 pips, the trailing stop remained at level 4.
Unfortunately, or fortunately for the trader, the market began reversing. It tried to get lower but failed. Rather, it began rising.
Do you remember where our trailing stop-loss order is positioned? Yes, at point 4.
As the market rose higher, it got past level 5 and went to level 4. Here, the trailing stop loss order was hit and the trade was closed with 120 pips.
If the trader was not professional and they expected the market to continue getting lower, they would have lost more pips and probably everything if they had not used a trailing stop loss.
From this example, we can see a few goods and bad things with this type of stop loss.
When you are about to place a trade on Mitrade. Immediately you hit the“buy”or“sell" , you will get the following prompt:
So, select trailing stop, and input your desired number of pips.
If, for example, you need to be booking 20 pips, input “20” in the box. Once your trade become profitable and moves to 20 pips, a trailing stop loss will be placed at the entry point of the trade.
Once it goes further and makes 40 pips, then the trailing stop loss will be moved to book 20 pips for you. As such, no matter what happens with this trade, you will always have your 20 pips profit.
It is that simple on the Mitrade platform!
Just like there is no single perfect trading strategy for everyone, there is also no best trailing stop loss percentage. A trader should consider things such as the behavior of individual pairs to determine the most favorable trailing stop percentage.
If a pair is very volatile, the trailing percentage should not be too tight. They can use smaller targets such as 10 to 20%. So, for every 40 pips, they will lock about 4 to 8 pips.
If a pair is very slow, they can use tighter stops like 60 or 70%. So, for every 100 pips, they will have between 60 to 70 pips locked.
All in all, trailing stop losses work best when trading higher timeframes since the trends last longer and tend to obey the rules of trend price action.
1. Unlimited Profits
If the trend had continued lower, the trader would be booking more and more pips. So, if the trend had continued for weeks or months as it does sometimes, the trader would have won thousands of pips for as long as the trend lasted.
2. It is Automatic
A trailing stop moves by itself. you do not need to monitor your charts all the time as it does all the work for you. In this way, fear and greed are eliminated from your trading.
3. It is Flexible
As we have seen, the trailing stop loss order can be customized as per the trader's needs. You can have a trailing stop starting from 1 pip to infinity. It is all up to you.
4. It Adheres to price action rules
The distance set by a trader for the stop distance allows natural price action to happen.
As we all know, the market moves up and down. Therefore, it gives the price time to correct and continue with the trend. In this way, a trader can comfortably ride a trend as far as it goes without premature exits.
1. No Offline Support
Trailing stop loss, unlike a normal stop loss, will not work when your chart is offline. Once you close your chart(s), the trailing stop loss does not work. You can solve this by using a VPS so that your charts are always online even when you are offline.
2. Some Pips are Lost
Another thing is that once the market starts opposing the trade until the time the trailing stop loss is hit, some pips are lost.
A trailing stop loss is a powerful yet highly underutilized risk management tool. If properly applied, it not only minimizes potential risks but also increases the possible profits by allowing the trader to milk as many pips from the market as possible.
From this post, you now have a clear understanding of how it trails the price. You also know that it is a customizable tool that can be tweaked to fit different types of charts or instruments.
Above all, as long as the trailing stop-loss order has been activated, you will always close the trade on the positive side.
Enjoy your new trading tool.
The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. *CFD trading carries a high level of risk and is not suitable for all investors. Please read the PDS before choosing to start trading.
Risk Warning: Trading may result in the loss of your entire capital. Trading OTC derivatives may not be suitable for everyone. Please consider our legal disclosure documents before using our services and ensure that you understand the risks involved. You do not own or have any interest in the underlying assets.