A Trailing Stop is a type of stop-loss order that adjusts according to the instructions defined by the trader. This feature helps in managing trades and risk, and if used correctly, it increases the success rate of trades.
As the price moves in the direction of profit, this order moves along with it, securing the profit of the trade. The main goal of this order is to protect the trade’s profit against the price movement trend.
What is Trailing Stop?
A trailing stop loss is an order designed for risk management during trading. The range of this order moves with the price when it goes in the direction of profit and remains fixed when the price moves toward loss.
The distance of this order from the current market price depends on the trading strategy; in some cases, it is determined as a percentage of the price, and in other cases, it is specified by the unit of volatility measurement in that market (for example, a pip in the Forex market).
Advantages and Disadvantages of Using Trailing Stop
If the price trend suddenly changes and the price moves toward loss, the Trailing Stop preserves part of the profit earned up to that point and closes the trade.
If such a sudden price move is only a short-term correction, the trailing stop loss causes an early exit from the trade, leading to reduced profit gained from the trade.
Advantages and Disadvantages of Using Trailing Stop:
Advantages | Disadvantages |
Protects trade profit | Possibility of early exit from a trade |
Reduces trade losses | Requires high trading experience |
Saves time | Requires continuous internet connection |
Applicable in all trading styles | Poor performance in ranging markets |
Example of Trailing Stop Loss
For instance, consider a buy trade on Solana at the price of $100 with a trailing stop range of 5%. If the price starts dropping immediately from $100, the trade will close at $95 with a loss.
However, if the price rises to $120, the Trailing Stop moves upward along with the price in the direction of profit.
If a downward move begins, the stop-loss order will activate at $114, thereby protecting part of the profit.
Comparison Between Trailing Stop and Regular Stop Loss
A regular stop loss and a trailing stop loss are both tools for risk management and reducing losses in trades. The main difference between them lies in how they react to price volatility.
A Trailing Stop adjusts automatically with market price fluctuations according to the trader’s instructions, while a fixed stop loss remains unchanged unless manually modified, showing no reaction to price movement during the trade.
Comparison of Trailing Stop and Regular Stop Loss:
Comparison Parameter | Regular Stop Loss | Trailing Stop |
Reaction to price volatility | No reaction to market fluctuation | Adjusts with price movement toward profit |
Operation method | Requires manual adjustment based on market conditions | Order range changes automatically |
Need for continuous internet connection | No | Yes |
Performance in different market phases | Same performance in all market phases | Relatively weak in ranging phases |
Placing a Trailing Stop Order in MetaTrader
To place a Trailing Stop order, the trade must first be opened according to the type of analysis.
Note: It is not mandatory to set a regular stop loss when placing a trailing stop, but to reduce risk, it is recommended to set a standard stop loss as well. This way, if the price moves against the prediction, excessive loss is prevented.
Steps to Place a Trailing Stop in MetaTrader 4 and 5:
- Open a trade: To set a trailing stop loss, a trade must be opened first;
- Set the trailing stop loss: Right-click on the trade and activate the “Trailing Stop” option;
- Specify the trailing stop range: After clicking on the Trailing Stop option, by default, several options between 15 to 50 points will be displayed.
Note: Every 10 points equals 1 pip.
The Custom option is designed to specify the trailing stop loss range at any desired interval. To use this option, click on it and in the input box, enter the desired trailing stop range in points.
Application of Trailing Stop in Trading
The main application of a Trailing Stop in trading is risk and capital management. This order executes based on defined instructions to secure a portion of the trade’s profit.
In Set & Forget trades, sometimes the price moves close to the take-profit order and then reverses toward the stop-loss order. The Trailing Stop ensures that if this happens, the trade not only avoids loss but also secures part of the profit and adds it to the account balance.
Different Methods of Defining the Trailing Stop Range
Depending on the asset being traded and the trading strategy, the method of determining the trailing stop loss range may differ. To select the right approach, factors such as market type, trade structure, volatility, and others must be considered.
Defining the Trailing Stop Range by Percentage
This method is more common in the cryptocurrency market, as price fluctuations are usually high. In this step, the trader defines the percentage distance at which the Trailing Stop will follow the current market price.
Note: In this method, the percentage is calculated continuously relative to the current market price throughout the trade.
Defining the Trailing Stop Range Based on Market Volatility Units
In different markets, volatility is measured using specific units. For example, in the Forex market, volatility is measured in pips.
In this method, the Trailing Stop range is measured and calculated based on the volatility unit of the respective market.
Defining the Trailing Stop Range Using Technical Indicators
In this method, the Trailing Stop range is determined using data from technical Analysis indicators. For instance, in a buy trade, the lower boundary of the Moving Average (MA) can be selected as the trailing stop range, and the stop loss will move upward along with the rising moving average.
Key Points for Placing a Trailing Stop Order
If mistakes occur when identifying the correct Trailing Stop area, a significant portion of the profit may be lost, and the account’s overall performance may drop.
If the range is placed too close to the market price, the trade may close prematurely due to normal fluctuations. Conversely, if the range is set too far from the price, a large portion of the profit may be lost.
Key Points for Placing a Trailing Stop Order:
Conclusion
A Trailing Stop is a dynamic stop-loss order used for both risk and trade management. This order adjusts based on the trader’s instructions, moving with the price in the direction of profit, and helps secure gains.
Proper use of this order enhances trading account efficiency and saves time during trading.
However, correct application requires sufficient experience and skill in trading strategies, since any mistake in placing this order increases the chance of losing part of the profit.
