Trailing stop is an order which major function is an automatic maintenance of open position with permanent shifting of stop loss level depending on price movement.
Work principle
Trader opens a bullish position and sets the distance from current price to trailing stop in pips. If the price goes upwards, the trailing stop tails after it automatically sticking to the set distance. In case the price goes down, then the trailing stop quote remains on the spot. In this way, a trader using trailing stop has an opportunity to derive maximal profit at ascending price with no regard to the set Take Profit value. Furthermore, trailing stop is a loss limiter.
For instance, trader opens a buy position at the price of 1.3400 and puts the trailing stop value by 50 pips back, i.e. at 1.3350. In case the price starts moving upwards and exceeds the mark of 1.3400, trailing stop follows it automatically observing the set gap of 50 pips from the current price. That means, if the price touches 1370, the trailing stop shifts to 1320.
If the price turns down, the price does not change its position.
As to sell position opening, trailing stop behaves quite opposite. Trader puts it a few pips higher. At price descending motion the trailing stop shifts according to the set size. With the up-going price, the trailing stop does not move.
Applying trailing stop in Forex operations a trader will have to remove stop loss orders manually in line with trade profit increase. Trailing stop sets a stop loss level automatically at the value the trader needs.
Trailing stop is mainly used by traders who run trend trading, but have no possibility to track price moves permanently. Trailing stop usage is also reasonable at intraday trade, when quick reaction to any price change is required.
Worth keeping in mind that trailing stop works only in an active trading terminal. When the terminal is switched off the stop loss is fixed at its current spot.
