In trading, one of the most difficult decisions that we face is when to cut our losses and/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 or you should hold and win more pips.
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 of them is a trailing stop loss order.
We are going to see how a trailing stop order can protect your profits and improve your trading.
In this article, you should expect to learn the following things:
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.
On the other hand, 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 traditional stop loss that remains in the same place, a trailing stop loss order will move.
Are you wondering how this stop loss “moves?”
Now, just like the normal stop loss, a trailing stop loss order is used to limit the losses that you can incur in a trade.
However, the trailing stop usually works once your trade has become profitable.
You see, a normal stop loss is placed on the opposite side of a trade so that in case the market reverses, it will cut the loss from growing too big. As such, a stop-loss order usually culminates in a loss.
There are exceptions, though, such as when you move the stop loss to breakeven once your trade has become positive.
On the other hand, a trailing stop order usually works to protect already-won profits from being absorbed back into the market. Therefore, it usually ends with some profits.
To use it, the trader directs the trading platform to lock in “X” profits after the market has made “Y” profits.
For instance, I might set up my trailing order to lock in 20 pips for every 40 pips that my trade is in profits
So, let’s say I opened a XAUUSD buy trade and used the above setting. When my trade will be profitable by 40 pips, then the trading platform will automatically create a stop loss at 20 pips. In case the market failed to move past the 40-pip level and turned back, it will fall and get stopped at the 20-pip level where the trade will be closed.
In it, I will exit with 20 pips of profit.
If the trade moved on and made another 20 pips (60 pips profit), then the trailing stop will automatically get moved to the 40-pip level. In case the market reversed and hit the 40-pip trailing stop level, then I will exit with 40 pips of profit.
Do you understand now?
Some trading platforms hide this feature and that is one of the reasons so many traders do not know about it.
Well, you can check out Mitrade platform and see just how simple it is to use the trailing stop.
There are 2 simple ways.
The first one is automatic when you are about to place a trade. Immediately you hit the “buy” or “sell” button, 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.
Do you understand how it works now?
The second way that you can use the trailing stop on the Mitrade platform is after you already have an active trade.
So, if you have an already running trade, look at the left side panel and click on the “Positions” tab.
It will open all your active trades on the right side.
Now, click the “Edit” button on the trade that you need to add the trailing stop loss to as shown below:
Once you click that button, the following dialogue box will appear:
Edit the number of desired trailing stop loss distance as directed in method 1.
It is that simple on the Mitrade platform!
Do you remember reading about market orders and limit orders?
Well, a market order is executed immediately while a limit order remains pending and is only executed after a pre-set price or value is reached.
In light of the above definition;
A trailing stop loss order is a market order. This is because once you set the order to get executed when the market has made X pips, it becomes executed when that happens. There is no delay or waiting.
On the other hand, a trailing stop loss limit order is a limit order. In this case, the trader sets the platform to activate a trailing stop order once the price or value reaches a specific level.
For example, if I have EURUSD sell trade executed at 1.09320, I might decide to activate my trailing stop loss order when the market falls to level 1.08070.
In short, the trailing stop will become active when that specific price is reached. This time, the trailing stop loss order is activated by a price or value as opposed to a number of profitable pips.
It is worth noting that you can only use one of these orders at a go; that is, you cannot have a trailing stop loss and a trailing stop limit order in the same trade.
The simplest answer to this question is that professional traders are the ones that use trailing stops.
A professional trader is a person who:
● 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
If you read most online resources, they will tell you that trailing stops don’t work or they take away your profits.
These statements can only be true if the one using the trailing stop loss order is not a professional. In short, if you use this tool wrongly, or if you don’t understand the nature of the market, then you will never be able to use it.
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.
Still, they know that the market might reverse and execute their stop losses prematurely then keep going in their direction.
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 good and bad things with this type of stop loss.
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.
This is unlike using a fixed take profit level which limits profits.
2. It is Automatic
A trailing stop moves by itself.
As such, 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.
On the contrary, there are a few dislikes about the trailing stop;
1. No Offline Support
Though we did not mention this, a 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.
This is not a problem for pro traders since they understand that we owe the market nothing, so it can give or take the pips as it pleases.
Just like there is no single perfect trading strategy for everyone, there is also no best trailing stop loss percentage.
The trader in our example above used 50%, that is, they would book half of their total pips profit. That is why for every 40 pips moved, they would lock 20.
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 t0 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.
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. The information provided here does not consider one or more of the objectives, financial situation and needs of audiences. In addition to the disclaimer below, Mitrade does not represent that the information provided here is accurate, current or complete, and therefore should not be relied upon as such. This information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Mitrade is not a financial advisor and all services are provided on an execution only basis. We advise any readers of this content to seek their own advice.