Forex trading has gained immense popularity in recent times. It is an attractive opportunity for traders who want to make a profit by buying and selling currencies. However, to be successful in forex trading, one must have a thorough understanding of the various concepts and techniques used in the market. One such concept is the trailing step. In this article, we will discuss what trailing step is in forex and how it can be used to maximize profits.
What is Trailing Step in Forex?
Trailing step is a technique used in forex trading, which is used to manage risk and maximize profits. It refers to the distance between the stop loss order and the current price of the currency pair. In simpler terms, it is the number of pips that the price must move in the trader’s favor before the stop loss order is moved to break-even or a profit.
For instance, let’s say a trader buys a currency pair at 1.2000 with a stop loss order of 1.1900, and a trailing step of 20 pips. If the price of the currency pair moves in the trader’s favor by 20 pips, the stop loss order is moved to break-even or 1.2000. If the price continues to move in the trader’s favor, the stop loss is trailed by the same number of pips.
How does Trailing Step work?
The trailing step is used to lock in profits while minimizing risk. When a trader enters a trade, they set a stop loss order to limit their losses if the trade moves against them. However, as the price of the currency pair moves in the trader’s favor, they can use the trailing step to move their stop loss order closer to the current price. By doing so, the trader can lock in profits while limiting their potential losses.
For example, if a trader buys a currency pair at 1.2000 with a stop loss order of 1.1900 and a trailing step of 20 pips, and the price moves in their favor by 40 pips, they can move their stop loss order to 1.1980. This means that even if the price reverses and moves against the trader, they will still make a profit of 20 pips. If the price continues to move in their favor, the stop loss order can be trailed by the same number of pips.
Advantages of Trailing Step
Trailing step has several advantages in forex trading. Here are some of them:
1. Risk Management: The trailing step helps traders to manage their risk by limiting their potential losses. By moving the stop loss order closer to the current price, traders can lock in profits and minimize their exposure to the market.
2. Maximizes Profit: Trailing step helps traders to maximize their profits by allowing them to stay in profitable trades for longer. As the price moves in their favor, they can move their stop loss order closer to the current price, thereby locking in profits.
3. Reduces Emotional Trading: Trailing step can reduce emotional trading by automating the process of moving the stop loss order. Traders can set the trailing step and let the system do the work, thereby reducing the risk of making emotional trading decisions.
Disadvantages of Trailing Step
Trailing step also has some disadvantages that traders should be aware of before using it. Here are some of them:
1. False Breakouts: Trailing step can result in false breakouts, where the price moves in the trader’s favor, but then reverses and hits the stop loss order. This can result in losses for the trader.
2. Over-optimization: Traders may become over-optimistic and use a trailing step that is too tight, resulting in frequent stop losses, or too loose, resulting in missed profits.
3. Market Volatility: Trailing step may not work well in volatile markets where the price moves quickly and unpredictably. In such cases, the stop loss order may not be able to keep up with the price movement, resulting in losses for the trader.
Conclusion
Trailing step is a useful technique in forex trading that can help traders to manage risk and maximize profits. It allows traders to lock in profits while limiting their potential losses. However, traders should be aware of the disadvantages of trailing step, such as false breakouts, over-optimization, and market volatility. By understanding the concept of trailing step and its advantages and disadvantages, traders can use it effectively to improve their trading results.
