Forex trading is done in a highly volatile market and it is quite common to notice many currency pairs that go down really fast after showing steady increases for longer periods of time. In most cases an investor will pair up the gains by simply holding on to the chosen pair, hoping that we are in front of a temporary downturn. In order to minimize risks you might want to use trailing stops, which are great for limiting losses and basically avoiding scenarios like the one mentioned before.
One advantage that trailing stop brings to the table when compared with other strategies used in forex is the fact that the stop loss level that we choose will grow with the growth of the currency prices. When the prices will tumble there will be profit as all is sold as soon as the trailing stop point is reached. Due to this fact the trader can maximize on profits while limiting loses, all without having to constantly use stop loss orders.
Forex Trailing Stops
Trailing stop loss orders can be set up in different ways. In most cases the traders will use a percentage as an indicator or there is also the possibility of setting point number values under the current trading price. Traders basically choose how much loss would trigger the selling of the currency in order to limit losses. The points chosen will mark a profit, no matter how down the market goes.
Trailing Stops – Percentages
By using this strategy we notice that the trailing stop levels will move based on a percentage setting that was set by the trader. This basically means that the trigger price for the sell/buy order will constantly readjust every time that we see a new high value. In the event that the price is going to move in a reverse direction the stop will stay at the same level.
As a simple example, let us say that a trader will set the trailing stop at 10% on EUR/USD. This is done when we see the pair at a trading level of 1.4010. With this price trailing stops will be put at 1.2609. As soon as this price is reached investors are going to execute the given trade. In the event that we see that the market price increases to a level of 1.6010, the new trailing stop level is going to be fixed at 1.4409.
Trailing Stop Price
In a similar fashion to the method used above, a trader might also set trailing stops at a special value that is equal to a number of points under a high price. This is used instead of percentage. The difference is that in this case we have a precise trailing stop price. The percentages will show variations and is not as precise.
When trailing stops are set based on support levels the trader will take advantage of market psychology, which is usually linked with all currency pairs. No matter what method you use to determine the trailing stop value, it is important to practice the technique before using it in your real money account.