How to use a trailing stop in forex trading

Learn Forex: How to Set Stops.

Price action and Macro.

Article Summary: Many traders know that they need to place stops, and if they don’t know they will likely learn very quickly. Market movements can be unpredictable and the stop is one of the few mannerisms that traders have to prevent one single trade from ruining their careers.

When traders begin to learn to trade, one of the primary goals is often to find the best possible trading system for entering positions. After all, if the trading system is good enough, all the other factors like risk management, or trade management – well, they can take care of themselves, right?

After all, if our trades are moving in our direction and we are making money, all of these other factors might seem unimportant: All we have to do is find that system that works at least the majority of the time, and then most traders figure they can figure everything else out as they go along.

Unfortunately, the truth is that all of the above assumptions are hogwash. There is no system that will always win a majority of the time, and without trade, risk, and money management – most new traders will be unable to reach their goals until they make some radical changes to their approach.

This is a wall that many traders will hit, and a realization that will become part of most of their realities. Because likely, none of us will ever walk on water, or have a crystal ball so that we can display super-human capabilities of predicting trend directions in the Forex market.

Instead, we have to practice risk management ; so that when we are wrong, losses can be mitigated. And when we are right, profits can be maximized. Once again, most traders that will find success in this business are going to come to this realization before they can adequately address their goals.

Realizing that risk management must be practiced is one thing, but doing it is an entire different matter. That’s what this article is about, investigating the importance of using stops and then further, some various ways of doing so.

Why are stops so important?

Stops are critical for a multitude of reasons but it can really be boiled down to one simplistic cause: You will never be able to tell the future. Regardless of how strong the setup might be, or how much information might be pointing in the same direction – future prices are unknown to the market, and each trade is a risk.

In the DailyFX Traits of Successful Traders research, this was a key finding – and we saw that traders actually do win in many currency pairs the majority of the time. The chart below will show some of the more common pairings:

Traders saw greater than 50% winning percentages in many of the most common currency pairs.

So traders were successfully winning more than half the time in most of the common pairings, but their money management was often SO BAD that they were still losing money on balance. In many cases, taking 2 times the loss on their losing positions than the amount they gain on winning positions. This type of money management can be damaging to traders: necessitating winning percentages of 70% or greater merely to have a chance at breaking even. The chart below will highlight the average loss (in red) and the average gain (in blue).

Traders lost much more when they were wrong (in red) than they made when they were right (blue)

In the article Why do Many Traders Lose Money , David Rodriguez explains that traders can look to address this problem simply by looking for a profit target AT LEAST as far away as the stop-loss. So if a trader opens a position with a 50 pip stop, look for – as a minimum – a 50 pip profit target. This way, if a trader wins more than half the time, they stand a good chance at being profitable. If the trader is able to win 51% of their trades, they could potentially begin to generate a net profit – a strong step towards most traders’ goals.

But now that we know that stops are critical, how can traders go about setting them?

Setting Static Stops.

Traders can set stops at a static price with the anticipation of allocating the stop-loss, and not moving or changing the stop until the trade either hits the stop or limit price. The ease of this stop mechanism is its simplicity, and the ability for traders to ensure that they are looking for a minimum 1-to-1 risk-to-reward ratio.

For example, let’s consider a swing-trader in California that is initiating positions during the Asian session; with the anticipation that volatility during the European or US sessions would be affecting their trades the most.

This trader wants to give their trades enough room to work, without giving up too much equity in the event that they are wrong, so they set a static stop of 50 pips on every position that they trigger. They want to set a profit target at least as large as the stop distance, so every limit order is set for a minimum of 50 pips. If the trader wanted to set a 1-to-2 risk-to-reward ratio on every entry, they can simply set a static stop at 50 pips, and a static limit at 100 pips for every trade that they initiate.

Static Stops based on Indicators.

Some traders take static stops a step further, and they base the static stop distance on an indicator such as Average True Range. The primary benefit behind this is that traders are using actual market information to assist in setting that stop.

So, if a trader is setting a static 50 pip stop with a static 100 pip limit as in the previous example – what does that 50 pip stop mean in a volatile market, and what does that 50 pip stop mean in a quiet market?

If the market is quiet, 50 pips can be a large move and if the market is volatile, those same 50 pips can be looked at as a small move. Using an indicator like average true range, or pivot points, or price swings can allow traders to use recent market information in an effort to more accurately analyze their risk management options.

Average True Range can assist traders in setting stop using recent market information.

Created by James Stanley.

Using static stops can bring a vast improvement to new trader’s approaches, but other traders have taken the concept of stops a step further in an effort to further focus on maximizing their money management.

Trailing stops are stops that will be adjusted as the trade moves in the trader’s favor, in an attempt to further mitigate the downside risk of being incorrect in a trade.

Let’s say, for instance, that a trader took a long position on EURUSD at 1.3100, with a 50 pip stop at 1.3050 and a 100 pip limit at 1.3200. If the trade moves up to 1.31500, the trader may look at adjusting their stop up to 1.3100 from the initial stop value of 1.3050.

This does a few things for the trader: It moves the stop to their entry price, also known as ‘break-even’ so that if EURUSD reverses and moves against the trader, at least they won’t be faced with a loss as the stop is set to their initial entry price. This break-even stop allows them to remove their initial risk in the trade, and now they can look to place that risk in another trade opportunity, or simply keep that risk amount off the table and enjoy a protected position in their long EURUSD trade.

Break-even stops can assist traders in removing their initial risk from the trade.

Created by James Stanley.

But what if EURUSD moves up to 1.3190 and our trader decides to get greedy? Well, in this case, they can remove the limit altogether and instead look to trail their stop as the trade moves higher. After price moves to 1.3200, the trader can look to adjust their stop higher to 1.3150, a full 50 pips beyond their initial entry so now, if price reverses, they are taken out of the trade for a 50 pip gain.

But if EURUSD moves higher, to 1.3300 – they can enjoy a larger upside than they initially had with their limit at 1.3200.

Traders can look to manage positions by trailing stops to further lock in gains.

Created by James Stanley.

This is maximizing a winning position, while the trader is doing their best to mitigate the downside.

Dynamic Trailing Stops.

There are multiple ways of trailing stops, and the most simplistic is the dynamic trailing stop. With the dynamic trailing stop, the stop will be adjusted for every .1 pip the trade moves in the traders favor.

So, at the outset of the trade in the above example, if EURUSD moves up to 1.3101 from the initial entry of 1.3100, the stop will be adjusted up to 1.3051 (increased 1 pip for the 1 pip move the trade made in the trader’s favor).

Dynamic Trailing Stops adjust for every .1 pip that the trade moves in the trader’s favor.

Created by James Stanley.

Fixed Trailing Stops.

Traders can also set trailing stops through Trading Station so that the stop will adjust incrementally. For example, traders can set stops to adjust for every 10 pip movement in their favor. Using our previous example of a trader buying EURUSD at 1.3100 with an initial stop at 1.3050 – after EURUSD moves up to 1.3110, the stop adjusts up 10 pips to 1.3060. After another 10 pip movement higher on EURUSD to 1.3120, the stop will once again adjust another 10 pips to 1.3070.

Fixed Trailing stops adjust in increments set by the trader.

Created by James Stanley.

If the trade reverses from that point, the trader is stopped out at 1.3070 as opposed to the initial stop of 1.3050; a savings of 20 pips had the stop not adjusted.

Manually Trailing Stops.

For traders that want the upmost of control, stops can be moved manually by the trader as the position moves in their favor. This is a personal favorite of mine, as price action is a heavy allocation of my approach, and many of my strategies focus on trends or fast moving markets.

In the article, Trading Trends by Trailing Stops with Price Swings , we walk through this type of trade management. When using price action, traders can focus on the swings made by prices as trends move higher or lower. During up-trends, as prices are making higher-highs, and higher-lows – traders can move their stops higher for long positions as these higher-lows are printed. Once a ‘higher-low’ is broken, the trader will exit the trade under the presumption that the trend that they were trading may be over.

Trader adjusting stops to lower swing-highs in a strong down-trend.

--- Written by James Stanley.

To contact James Stanley, please JStanleyDailyFX . You can follow James on Twitter JStanleyFX.

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LEARN FOREX: How to Effectively Use a Trailing Stop.

by Walker England, Trading Instructor.

One of the recurring issues I see with new traders is their difficulty with exiting open positions. This isn’t surprising, as so much emphasis is put on planning the perfect entry that traders tend to forget to develop a strategy for exiting a trade once it’s open. This is unfortunate as knowing when to exit a trade is vital for any trading plan, and is often what separates new traders from professionals in the Forex trading world. With this in mind, today we will examine how to effectively manage an open position using a trailing stop.

First, it is important to know that a fixed trailing stop is an advanced entry order designed to move a stop forward a specificed amount of pips after a position has moved in your favor. Traditionaly fixed trailing stops are used in conjuncture with a trending market strategy, to lock in profits on an extended move. Today we will take a look at a sample trade on the EURJPY 8HR chart pictured below, to examine how a trailing stop may work in our favor. The chart below depicts our initial entry to sell the EURJPY at 103.27. To initially contain our risk there is a stop of 150 pips being placed at 104.77, with the fixed trail set to 150.

Created with FXCM’s Marketscope/Trading Station.

The Chart above also depicts what will occur if the EURJPY moves in our favor as planned. Since our trail is set to 150 this means that if our trade moves 150 pips in our favor our stop will update that same amount. In this example this means our first trail would update our stop to 103.27, effectively moving out position to break even. From here the trailing stop will continue to lock in profit every time the trade moves in our favor the selected amount.

It is important to remember that the trailing stop by design is designated to close our trade. At any point in time a trade may move against our position and close the position at the designated stopping point. If this occurs immediately in the example above our position would be closed for a 150 pip loss. However, when using the benefits of a trailing stop we can then continue to lock in profit as the trend moves in our favor.

---Written by Walker England, Trading Instructor.

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Trading Forex with a Trailing Stop.

Many traders have heard of the truism, 'cut your losses short, and let your profits run.' However, if you are unfamiliar with a tool to help you implement this tried and true wisdom, it's time you familiarize yourself with the trailing stop. If you've never heard of a trailing stop, it's just like a regular stop order, except you can set it to move along with the market.

Forex Trading Trailing Stop Strategy Example:

Here is an example, let's say that you want to go long on EUR/USD, and you set an emergency stop that will be triggered if the market ultimately moves against you.

After a day or so, the trade is completely in your favor, so you want to lock in some profit and see what happens. You could set a stop in positive profit territory, and make it a trailing stop. If the market continues to move in your favor, your profit lock will increase. That will continue to happen until the market flips back in the other direction and hits your stop.

The primary function of the trailing stop is to increase your profit lock as the market moves, without the need for you to intervene and adjust. The trailing stop functionality allows you to follow trends with a safety you are comfortable with, that you don't have to monitor constantly.

Another good example of how to use a trailing stop is for trading longer terms. You set your initial stop far away from the market and just allow things to develop. This works well for slow trading systems that lock in profit over months and days.

I prefer to set a long-term target, and also have a trailing stop. This allows you to set up your entire trade early on and just allow it to run its course.

The forex market runs 24 hours 6 days a week. This is a fair amount of hours to monitor. Rather than getting no sleep and broken sleep, it makes better sense to set a trailing stop on your trade.

The big benefit is that your profit lock increases while you sleep. The market will always do what it will do, and your trade will adjust itself or stop out.

Be Careful When Using Trailing Stops.

If you are day trading, you need to be careful using trailing stops. The forex market is typically a little "whippy" which means that currency pairs can cycle up and down before they move their ultimate direction. If you set a tight stop close to your price and the price whips forward and then back, your trailing stop is likely to be hit. So, it's something that you should use carefully.

Stops are meant to protect your capital but aggressively setting them close to the price tends just to clean out your account little by little as you get stopped out over and over. I've seen many new traders try to lock in as little as five pips of profit when their trade is only ten pips in the positive. This tight of a stop is not the worst, but these are usually the same traders that will set a stop five pips below their current trade price. How you set stops always depends on your actual forex trading method, but it's good to be aware of setting them too close to a moving price.

Some of the newer regulations have changed the way that stops are handled.

Position trading is a type of trading where you average your trade price. That is, you make a buy, the price drops and you buy more, you average price falls somewhere in the middle. Some of the newer regulations in the US have disallowed partial profit taking that used to be available. Some brokers are in disagreement as to exactly how this is handled, but, if you set a stop on your newest trade, the broker actually will apply it to your oldest trade in that pair. If you aren't mindful of this, it can cause you to accidentally realize a loss, even though your most recent trade is in profit.

In conclusion, trailing stops are a great trading tool that allows you to not only protect yourself but to lock in more and more profit, without watching the market every second.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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Forex Trailing Stop Loss Trading Example.

I am glad that I have received s from readers telling me how much they like the post that I have written about the trailing stop loss a few days back. At the same time, there are readers who ask me to show them examples of how to use this trailing stop loss and that is exactly what I am going to do in this post.

Let us start with using the EURUSD 4 hour chart as an example. Let says that I decided to enter a trade at 1.33783 where the price came back to retest the new support.

At this point of time, I could set a trailing stop loss at 1.35783 which is 200 pips from the point of entry. Do note that you still have to set a normal stop loss as the trailing stop loss will only be activated when the price hits 1.35783. When setting your trailing stop, you need to specific after how many pips of retracement you are going to exit your position. In this example, I will set it to 30 pips.

The trailing stop loss level is always your target profit. The whole purpose of using trailing stop is to get more pips from your trade. Once the trailing stop loss is activated, your normal stop loss will be deactivated.

From the picture below, you can see that the price has hit the red line which is where the trailing stop loss is being placed. After hitting that level, the price continued to move another 112 pips which means that you are making additional profit.

As the price retraces back by 30 pips, your position will then be closed. In this example, you are making extra 82 pips from the normal 200 pips trade. As I have stated in my previous post, this type of stop technique is only applicable to trade with at least 80 pips of target profit and above.

I hope that this example is good enough to show you how this technique works and do feel free to give your comment below. If you have question, do feel free to ask by commenting below.

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KRISTOFA OKENTA says.

Thank you dear Kelvin for this nice information. With the picture the illustration is more clear. But you did not show where you placed your original or initial stop loss. You showed the entry point, the trailing stop point, the profit target and the extra move which retraced 30pips back.

All those was clear but please do show where the initial stop loss was. Was it before or below the entry point?

I did not show you the initial stop loss as the amount of stop loss differ per trader.

If you are going LONG, the stop loss will always be below the entry. If you are going SHORT, the stop loss will always be above the entry.

tarun singh says.

I want to buy your master skills books but in india i think we have forex trading little different then us or europe market bcoz here 200 pips is brokrage only. i am confused what to do bcoz u have wrote a book for us eur forex trader so pls suggest me.

The book that I have written is not just for EURUSD, the technique is applicable to all currency pairs. So do not worry.

tarun singh says.

will you pls explain me little on EUR INR OR GBP INR.

I will not be able to talk about EURINR or GBPINR as I do not trade INR at all. Really sorry about it. However the concept of trading is universal. What I share here should work for all currency pairs.

I just started in trading forex. In fact , I am still using the demo account .

I just need your professional guide…

If I anticipate the currency pair and trend will be strong ( a buy position ) , can I set the Stop Loss at 25 pips , the Take Profit at 65 or 85 pips.

and the Trailing Stop at 45 pips. Is this set-up correct ? Pls advise…

It is fine to set the stop loss at 25 and take profit at 65 to 85 as you will have a decent risk reward ratio.

As for your trailing stop loss, 45 is a bit too much. If your profit is 85, my personal opinion is to set your trailing stop at 35 as you will still win 50 pips even if your trailing stop is stopped out and this will give you a 1:2 risk reward ratio. If you are going for the 65 pips profit, the trailing stop loss should be at 15 pips but I feel that it is a bit too tight.

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