Traders often hear the term ‘position management,’ but many new forex traders don’t fully understand how it differs from simply monitoring an open position. In this article, we’ll explore one of the position management techniques on the foreign exchange market—trailing stop.
Trailing Stop — a Floating Stop-Loss
Trailing stop is commonly used in forex trend strategies when it’s necessary to preserve existing profits, although it can be applied with any trading approach.
For example, after a price bounce off a support line in an uptrend, you open a long position, setting a take-profit at the resistance level and a stop-loss below the local low. As known, the market is volatile. Suppose the price doesn’t reach your take-profit order. When you look at the trade next time, you might only manage to lock in some remaining profit, or worse, end up with a loss from the stop-loss.
A trailing stop (Trailing Stop) is an algorithm for managing a stop-loss order without active trader participation. It allows the protective order level to move with the price if it moves in the desired direction.
How to Set a Trailing Stop on Forex
In simple terms, a trailing stop on Forex follows the stop-loss order by a number of pips specified by the trader, hence the term ‘trailing.’ For instance, a short trade is opened at 1.24643 for EUR/USD with a take-profit at 1.24530 and a stop-loss at 1.24709.
To set a trailing stop in the MetaTrader 4 trading terminal, right-click on the trade line to bring up the context menu.
You can choose the number of pips provided or set it manually. After setting the trailing stop, the stop-loss value in the trade line will be highlighted in yellow, indicating that the trailing stop is active.
IMPORTANT: When setting a trailing stop, pay attention to the fact that the ‘pip’ value for a five-digit quote is not equal to a standard pip, but represents the minimum price change. So, 50 pips in a four-digit terminal will differ from 50 pips in a five-digit terminal by ten times—5 pips on a four-digit quote = 50 pips on a five-digit quote.
After the price moves 50 pips in the desired direction, reaching 1.24593, the trailing stop automatically moves the stop-loss to the break-even level of 1.24643, and continues to shift the stop-loss 50 pips away from the price as it continues to fall. On the screenshot, you can see that when the price reaches 1.24582, the trailing stop moves the stop-loss to 1.24582 + 50 pips = 1.24632.
Note that the trailing stop only moves the stop-loss when the price moves in the correct direction. That is, when the price moves against the open position, the stop-loss will not move away from it.
The following screenshot shows that after moving the stop-loss to 1.24632, the price corrected upward, but the protective order remained in place and only started moving again once the price resumed its decline and the distance between it and the stop-loss exceeded the 50 pips again.
You can remove the trailing stop through the same context menu. Clicking ‘Delete All Levels’ will cancel it for all open orders it was set on, while clicking ‘No’ will remove it from the selected order.
Important Considerations When Using a Trailing Stop
The trailing stop will start moving the stop-loss only after the price has moved the number of pips you’ve set. Before that, the terminal will not take any action.
When using a trailing stop, you don’t need to set a stop-loss order; the trailing stop will handle it automatically once the price moves the required number of pips in the desired direction after the trade opens. However, experts recommend placing protective orders when opening a trade because no one is immune to sudden market changes, and the price could reverse before the trailing stop triggers.
As mentioned earlier, a key feature of the trailing stop is that the stop-loss only moves with the price in the correct direction. Simply put, the trailing stop pulls the stop-loss along with the price, but never pushes it away.
Additionally, the trailing stop is tied to the trading terminal. This means the feature will only be active when the MT is running. If you close the terminal, no one will move your stop-loss anymore.
The minimum distance from the current price at which you can set a trailing stop varies depending on the broker. In the example provided, it was 50 pips. For beginners, it’s especially important to calculate the trailing stop level correctly
FAQ
What is a trailing stop in forex trading?
A trailing stop is a dynamic stop-loss order that moves with the price in the desired direction, helping to protect profits without active trader involvement.
How do you set a trailing stop on MetaTrader 4?
To set a trailing stop, right-click on the trade line, select the number of pips, or set it manually. The stop-loss will then move automatically as the price changes.
Can a trailing stop move against the price?
No, a trailing stop only moves the stop-loss when the price moves in the favorable direction. It does not adjust if the price moves against the open position.
