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Managing your trading risks: The trailing stops

by , 29 January 2014

A manual trailing stop loss is a way of locking in profits as the trade goes your way. An automatic trailing stop is a way of locking in profits, but with much less room for volatility. Let's take a closer look the benefits of the manual trailing stop and the automatic trailing stop…

To use a manual trailing stop you need to look at the risk/reward on your chart, Max Munroe in Forex Round-Up explains... And instead of using profit targets, you only move your stop loss when the trade hits a key target.

When you do this, instead of putting fixed stops, you may put the stop slightly below a recent swing low if you are long, or above a recent swing high if you are short.

This gives the stop loss a little room, but also allows you to lock in profit.

Typically, you should wait for your second profit target (2:1 reward to risk) to be hit before moving your stop one level.

This gives the trade room to run, allows you to maintain a good risk/reward structure whilst allowing you to lock in profit on quick movers. Which is all good stuff.

Then there’s the automatic trailing stop

This is an automatic order set-up on your trading platform with fixed rules.

Normally, you will set your stop loss distance and step size in pips, then every step size movement up (if you are long) or down (if you are short) the stop loss will move.

So using a hypothetical EUR/USD trade, let's look at the chart:

So as the price moves up to point B, the stop automatically follows (trails) behind, maintaining the same distance between price and stop. And then to C, and so on.

This means you maintain your stop level, but is typically less flexible than a manual trailing stop.

Your risk profile here typically becomes quite fixed. But because you are using an algorithm, it doesn't have the ability to look at how price is moving.

Therefore it can place stops at levels that may be easy to take out too early, not giving the trade enough room to run.

So there you have it, the benefits of the manual trailing stop and the automatic trailing stop.

Managing your trading risks: The trailing stops
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