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Most of the people do not realize but trailing stops are one of the most important and essential tools that can help protect not only your investment but also your profits in the forex market. Trailing stops can save you from considerable losses in the currency market. I have heard about several people who lost their money just because they were unaware about stop losses and especially trailing stops.
Why use Trailing Stop?
The main objective or motive for using a trailing stop is to ensure that your losses are minimized in case of rapid retracing in the price of a currency pair. This means that a trailing stop is designed to prevent huge losses when the price of a currency pair that you are trading in starts moving in the opposite direction to the direction which you had anticipated while executing the trade.
Now a trailing stop is somewhat different than a stop loss. In case of a stop loss there is a fixed level at which a trade closes. This kind of behavior creates two basic problems for the trader. The first is that spikes in value of a currency can trigger stop losses thus closing your trades at a loss. The other is that when there is movement in prices during the day, the trade can totally reverse at night wiping out any profits.
These problems can be solved by using a trailing stop. The function of a trailing stop is to maintain separation between the current price and the stop loss for the currency pair. And as long as the trade is moving in your favor, the gap is maintained but when the price retraces backwards the stop loss is set at its last level and the trade is closed if that stop loss is met. Thus, your profits are protected to an extent and are not wiped out due to reversal in the prices of a currency pair.
Let’s take an example
Suppose that you have set up an order to buy when the value of a currency pair reaches 1.4050 with a trailing stop of 50 pips. Now the trade is triggered and your stop loss is set at 1.4000. Now suppose that you need to go somewhere and leave the trade running. As your trade moves up due to changes in currency pair price, your stop loss also moves up. Now suppose that after reaching a value of 1.4250 the price starts retracing. If no trailing stop had been set up you would have lost all that you have gained, but since you had set up a trailing stop of 50 pips, the stop has moved to 1.4200 due to movement of currency price to 1.4250, so even if the price started retracing the trade would close at 1.4200 giving you a profit of 150 pips.
Thus, a trailing stop can help you protect your investment as well as the profit which you have earned while trading in the forex market. Thus, it is a great tool for those who are too busy to sit in front of their broker terminal all day and execute trades.
