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Using 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 loss.

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 all rights reserved.

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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts