If you have spent some time in forex trading, you might have heard the term ‘truism.’ That is when you cut your losses short in order to let your profits run. Yet, to implement that, you need to understand the trailing stop in forex trading
A trailing is basically like a regular stop order, only, in trailing stop you can make it moves along the forex market.
The Example of Forex Trading with Trailing Stop Strategy
Imagine you want to go long on EUR/USD with an emergency stop that will be triggered whenever the market moves against you.
After, someday, you witness that the trade is in your favor and you want to get more profits. Then, you can set a positive profit territory and shift your emergency stop becomes a trailing stop. That way, if the market continues moving in your favor, you will lock more profit until the market flips to other directions, and hit your stop.
In short, the trailing stop strategy is to increase your profit lock when the market moves without the obligation to adjust and intervene. You do not need to constantly monitor the trade, but you still can follow the trend at the same time.
A good way to use a trailing stop is by trading long term. You just need to set the initial stop far from the market. Then, you will lock profit in months and days.
By that, you set up your entire trade early and let it run its course. Moreover, with the 24 hours in five days available market, you will not want to constantly monitor every move in it. Therefore, you need to use a trailing stop.
The Danger of Trailing Stop
If you are now doing day trading, you better be careful in using a trailing stop. Currency pairs in the market have the tendency to whip or to move ups and downs before it goes in the right direction.
Thus, setting your tight stop close to your price, your trailing stop can be easily hit when it whips forward and then back.
Indeed, stops should protect your capital, but aggressively set those close to the price will only clean your account slowly since it stops out over and over.
