Not so long ago on the pages of our website we described the strategy based on the use of the trailing stop, and then the questions began to arise, asking a few more words about this tool. For some reason, in many of the strategies described on the Internet, it is described rarely, that is why not everyone knows about it. Meanwhile, it is a very convenient way of risks insurance, not devoid of some disadvantages. With skillful use of the trailing stop it is possible to reduce the potential loss several times, more precisely, correctly to take profits.
How the trailing stop works
Trailing stop is an order to the broker (as well as placing other orders), which exhibited your protection (stop loss) will follow the price of distance, that you define.
Let’s review it using example. Open a short position by selecting an asset currency pair GBP/USD with the price of 1,5640 (point a in the figure below). Stop-loss set at the level of 1.5690. After some time we see that our earnings stopped at the point In (1,5460). We decided not to close the position in case we are lucky.
No luck, the market turned up and we were at the level of 1.5515 at the point where we fix the profit. Not bad, but could be more! Notice stop loss as they were at the level of 1.5690, and has remained there since.
Now we use a trailing stop. Put still stop at the level of 1.5690. The difference between 1.5690 and point A (1,5640) is called the step of the trailing stop. In this case it is 50 points. And now, when the price reaches a point In (1,5360), trailing stop obediently follows the price, stopping at the level of 1,5410
Then comes the reversal and the transaction is automatically closed at the level of 1,5410. The benefit is obvious, isn’t it? The drawback of this order is the only one — it only works when the computer is turned on. If we lose our Internet connection or electricity, the order is automatically removed. Alas.