What is Trailing Stop |
Many of the strategies described by us offer the following option for exiting the market: upon reaching a profit of a fixed number of points, half of the position is closed, the rest of it is insured with a stop at the breakeven level (at the level of opening a trade), after which a trailing stop is launched. The option of using trailing is quite justified, but it is not common in other strategies of the Internet. It would seem a logical advantage of using it, but it also has weaknesses, which we will discuss further.
Trailing stop: advantages and disadvantages of the instrument
Trailing stop is one of the functions of the trading platform (in particular MT4), which allows you to effectively manage the setting of safety orders (that is, stop loss). In fact, this is a stop loss, only dynamic, programmed to change the place of placing depending on the price movement.
- An illustrative example: a person ties a rake behind him and goes forward. As soon as he decides to take a step back, he will run into a rake and fall. The trailing stop is the same: it follows the price at a distance set by the trader in the direction of a positive trend. But as soon as the price reverses and reaches the stopped trailing, the trade will be closed.
This order allows you to take the maximum profit without the participation of a trader. If the trader had simply moved the stop loss to the breakeven level, in the event of a price reversal, he would have lost profit (although he would not have received a loss). But in the case of trailing, almost all the profit would remain intact. Trailing activation occurs when the price moves in the positive direction.
Disadvantages of a trailing stop:
- There is a need to set a long distance, which negates the effectiveness of strategies based on earnings due to volatility. It makes sense to place trailing on a strong trend in such a way that a random momentary correction does not close the deal. In strategies where the price moves quickly in both directions in a narrow range, it is not effective. Some brokers specifically set a minimum level limit of 15 points to exclude its use in scalping.
- Trailing works not on the broker’s server, but in the terminal, that is, in MT4 installed on the trader’s computer. If the connection to the server is lost (power outage, computer breakdown, Internet disconnection), trailing will automatically disappear. Therefore, trailing stop must be used in conjunction with a regular stop loss.
Another important feature: the trailing stop is triggered only once per tick (price change). If more than 1 trailing order is opened for one asset, then only the most recent trailing order is processed.
Trailing is enabled and disabled in the lower panel “Terminal”, where you can set the length of the trailing manually. The tool is interesting, but requires skills. A trader must understand at what point it is still worth insuring a position with a trailing stop, and at what point it is worth taking a risk and stopping at a regular stop. Therefore, advice: first practice on a demo account.