A Trailing Stop In FOREX trading. - Fibmaster
This tutorial is provided by Neal Hughes at FibMaster
A trailing stop is a stop-loss that you can set in an expert
adviser on the Metatrader 4 platform. The name is self-explanatory:
a stop loss that moves with the actual price movement in the
forex market. The stop
loss, is a marker you decide that will instruct your MT4 expert
adviser autopilot software (EA) to take you out of a trade when
it is in a losing position in order to avoid the risk of a large
There are some key concepts to understand as you think about
how to apply the trailing stop. A trailing stop moves only in
one direction. When you move into profit, the exit order trails,
adjusting equal to the
distance that the chart rallied. But if the market falls, it
remains stationery. So the market can rise and rise and you
go on making more profit. When the chart reverses a little,
the stop loss comes into effect and closes your trade preserving
your gains or limiting your losses.
To give an example, you open a long trade. Initially your position
is neutral, the chart has not moved. You set your trailing stop
at your entry minus 20 pips. If the trade goes against you,
and the forex pair drops, your stop-loss will activate and exit
your trade at -20 pips. But if the market rises, your stop loss
will rise with it.
So if the chart moves 20 pips in your favor, the trailing stop
will trail 20 pips below. If the market then falls and the price
hits the stop, you should exit at break-even.
If the pair rises by 40 pips, the stop moves up to 20 above
your entry. Your 20-pip profit is protected. In fact if the
position goes your way equal to the number of pips as your protective
trailing stop (in this example 20) you cannot lose.
You could achieve the same result manually, but this manual
process is unwise, you might not remember to exit at the time
you should losing more than you should. Also, an automated trailing
stop can work even
while you sleep. Provided you have MT4 turned on, an automated
stop-loss reduces almost all of the effort and pressure that
would arise in a trade.
Your risk tolerance as well as the current volatility are the
main factors in deciding the place for the trailing stop-loss.
You do not want to take a heavy loss yet simultaneously you
want a carefully planned exit. Beware placing a stop that is
too close to the entry will be triggered so often that you can
end up making constant tiny losses.
Used with permission. Copyright FibMaster.com
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