The importance of risk management in forex trading cannot be stressed enough. Whether you are new to trading or experienced, you will have heard that risk management is one of the most important aspects of trading. If you spend hours or days researching the perfect entry point for a trade, all your hard work will be pointless if you fail to think about risk management and exiting the trade.
If you fail to pay attention to risk management your account will almost certainly be a losing account. Understanding stop losses, different types and when and why they are used can help transform an account.
What is a trailing stop?
With a standard stop loss, you enter the price that you want the trade to close at. Should the market price hit the level stated as the stop loss level, the stop loss is activated, and the trade is closed. The stop loss price is fixed unless you the trader manually move it.
With a trailing stop you stipulate the distance that you want the stop to trail the market price. As the market moves in a favourable direction, the stop will trail the price as it is recalculated. In other words, a trailing stop loss permits the trade to gain in value as the market moves favourable, however should the market suddenly change direction then the stop loss will be activated at the recalculated price.
A trailing stop will only move in ta favourable direction, a trailing loss will not move against you. Should the market price move unfavourably hitting the stop loss, the trade is closed out.
When can you use a trailing stop
Vantage FX allows its clients to use trailing stop losses 24 hours a day as from when trading begins on Monday morning in Sydney to 9pm in New York on Friday when trading ends.
Why use trailing stops
The added benefit compared to a standard stop is that it is possible to reduce your potential losses or even lock in a profit without sitting in front of your open trade.
What to watch for
As with standard stop losses, trailing stop losses are vulnerable to gapping. As with any stops which are not guaranteed, a trailing stop may not necessarily be executed at the stated level. This means that if the market gaps then the execution price could be lower (for a stop sell order) or higher (for a stop buy order).
The other point to keep in mind is the distance used with trailing stop losses. Caution and care should be taken when deciding the distance to put the trailing stop at. If you only put a very small distance between the trailing stop and the market price, the stop loss will be hit very quickly, within what is the standard ebb and flow of trading fluctuations for a FX pair.
For example, if you only put your stop 20 points away from the market price, this could be hit very quickly before even giving your trade a chance to take off.