Introduction
A trailing stop order is used to reduce the risk in the trade. In other words, this tactic is used to lock the profit as the trade moves in the direction of the trader. If the intraday traders aim for the more prominent targets, then only use this tactic and if the goal is to book the profits every day, then do not use this technique.
EXPLAINING THE TRAILING STOP LOSS ORDER.
Trailing stop loss controls the risk of a trade. It is the way that trader used to get out of the trade if the market moves against them.
For, E.g., You bought ten lots of AUDJPY at 110 market prices and placed a stop loss at 109.70, which is 30 pips below your entry. Price action moves 40 pip in your favour, and then it started dropping, and in the end, the market fell back to the 109.70 is where you set your stop-loss order. Now the price action triggers your stop loss, and you are out from the market with a loss. This is how the simple stop-loss order worked.
On the other hand, if you used the trailing stop loss, then the stop-loss order can be moved as the price moves to reduce the risk in the trade. With the trailing stop loss, the trader moves the stop loss above the 109.70 area, which reduces the risk in the trade. If the market moved 70 to 80 pips in your favour, then the trader can even move the stop loss above the 110 area, then the trader even makes a profit if the trade hits the stop loss.
Assume you take a short position in the CADJPY forex pair at 88 and place the stop-loss order at 88.20 which is twenty pips above the entry. Price action dropped to 87. 40 and you are in 60 pips profit. Now you can opt to trail your stop loss, and you moved it to 88 levels. If the price action came back to the 88 levels now your trailing stop loss order will going to hit, and you end up in 20 pips profits. Keep in mind in selling trade the stop loss order should be moved down not up.
There are multiple trading platforms which provide the automatic trailing stop loss facility, and you can even set the trailing stop loss manually also.
PRICE BASED TRAILING STOP LOSS.
Price based trailing stop loss is one of the best and hassle-free way to reduce the risk. Because here you only need to set the stop-loss order after the entry and the rest of the work will be done by your trading platform automatically. A trailing stop loss will automatically move the stop loss of your trade. All you need to do is to set the number of pips you want your stop loss to move according to the market movement. If you put 30 pip stop loss, then it will remain away 30 pips from the market price.
Assume you bought NZDJPY at 132.20 and you set the stop loss at 132 which is 20 pip away from your trade. So if the NZDJPY price rises from the 132.20 to 132.40, then your stop loss will automatically move to 132.20, and if the price goes to the 133.20, then the stop loss will move to 133 levels. If the price of the NZDJPY start dropping then your stop-loss order is not going to drop down, instead it will stay at 133 levels. In this way, you are not going to end up in loss; instead, the stop loss will liquidate your position in 80 pip profit at 133 levels.
On the other hand, if the trader activates the short position in CHFJPY at 145.80 and set the stops at 146, then they are risking 20 pips in per lot. If the price declines to 145.50, then the trailing stop loss will be at the 145.70, locking in a profit for a trader. Furthermore, if the price of the forex pair moves to the 142, then the stop loss will automatically move to the 143.20. Once the trailing stop loss drops, it never goes back up. So if the price of the security starts rising, then the trailing stop loss will close the position at the 143.20 level. You can close your trades even manually by choosing the take profit according to the markets. This is the automatic version of the trailing stop loss which is available at the most trading platforms and at the time of activating your trades don’t forget to set your stop loss from manual to trailing.
MANUALLY USING THE TRAILING STOPLOSS.
The experienced traders commonly use the manual stop-loss order because it provides the flexibility to move the stops freely. Instead of using the trailing stop loss, in this case, they use the standard stop-loss order to trade the market. The most common way traders use the manual stop loss is they wait for the price action to pull back to the significant level and when the prices have risen enough, they move the stops below the pullback.
For example, a trader bought GBPJPY at 132.20 and prices action pulled back to 131.70 and started its uptrend again; in this case, the manual stop loss must be around the 131.65 level.
Some breakout traders also use the manual stops to trade the market. The breakout traders mostly move the stops just below the breakout line. This is because if the price action came inside the breakout, then it simply means Prices used the breakout line as a fake-out to bring some more orders to the table.
INDICATOR BASED TRAILING STOP LOSS METHOD.
Some of the indicators also designed specifically for the trailing stop loss. Here you also need to move the stop-loss order manually to trade the market. Most of the trailing stop loss indicators are based on the Average True Range (ATR), which measures how much the prices of an asset moved in a particular time period. If any currency moves 15 pips every 10 minutes, then the ATR will show the readings of 15, and if any asset moves 25 pips every 10 minutes, then the ATR readings will be 25. Assume you buy an AUDJPY at 88.40 and using the stop loss of 25 pips at 88.15. So when the price action moves to your favour, you should trail your stop loss 25 pips behind the highest price achieved since entry. If the prices moved to 88.90, then stops should be moved to 88.65. Continue to do this until the price action hits the stop loss order and close the trade.
The ATR trailing stops is another tool which can be used to trail the stop loss on the price chart.
The image below represents the indicator. Keep in mind this indicator is not useful to take an entry; instead, it is only helpful to close your trade. If you took a buying trade, then you must hold a trade until the price action moves above the dots and for the sell-side only closes the trade when prices break above the dots. Using this indicator to enter a trade is quite useful but using it to staying in trade is beneficial.
Moving Average, Chandelier exits, Parabolic SAR stop loss indicators are the other tools which traders can use to trade the markets well.
PROS AND CONS OF TRAILING STOP LOSS ORDERS.
Trailing stop loss is very useful to trade the strong trending markets. In the strong markets prices most often moved in one direction continuously, and much of that trend will be captured for profits. In other words, allowing the trades to run in strong conditions until they hit the trailing stop loss can result in significant gains. Trailing stops is also beneficial when the half or more than the half of the trade moves into your favour and reverses and end up hitting your stops. In these cases, you will go to end up in profits always, or it prevents the winning trades turning into losers.
The major problem with the trailing stop loss is it is hard to use in the channel conditions, high volatile market and during the major news events. When the trend is about to end or in a highly volatile market, we often witness the price action continuously reversing and hitting the trailing stop loss. In this case, most of the time traders end up by making a small amount of money only. During the news events prices sometimes smack back very hard, and then it again moves back to its original side. So here trailing stops almost failed to perform. The quick advice is to avoid using the trailing stop loss in the volatile or in a dying market, and during the extreme news, events don’t trade the market at all.
CONCLUSION.
In the world of trading, there is no perfect solution at all for the problem mentioned above. The real traders adjust themselves and their trading strategies according to the market circumstances. Change, evolve, adjust is the real key to everything, mould or bend yourself according to the situations to make the cash from the game. It is advisable to use the stop loss indicators first on the demo, and then only applied them to the live, because sometimes these indicators didn’t perform well in the market. We advised you to use the manual stop loss method to move the stop loss, if you solely depend on the indicator or automatic stop loss then the indicator may get you out from the market too early or too late on some occasions.
