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A trailing stop is one way of managing your trades in Forex which allows you to stay in a winning trade and reduce your risk as you go. One way of managing your trade exits is simply to exit your trade when you hit a certain target profit—but if you’re already in a winning trade, you might want to consider staying in if you don’t get any clear indication that it’s time to get out. After all, what if your hourly trade is the beginning of a trend which will last for days or weeks?
If you do choose to stay in a trade for a long time though, you want to reduce your risk as you go. The way to do this is to use trailing stops which follow your trade as price moves in the direction of your trade.
You can “trail” a stop manually or automatically. To trail a stop manually, you simply move your stop order yourself as your trade advances. For example, if you hit your original target, you could move your stop to halfway and then wait. That way you’ve protected half your profits in case of a reversal. At that point you’re in a “risk-free trade” with a guaranteed profit. Once your trade moves along, you could then move the stop up further toward your target profit. If success continues, you would move the stop past your original target and so on until you finally decide to exit or get stopped out.
Some people don’t like doing this manually and want the stop to move along with the trade a certain distance behind price. FX trading brokerage allows most platforms to do this for you. You can also set MetaTrader 4 up to do this automatically.
To create a MetaTrader 4 trailing stop, keep these guidelines in mind. The stop should not begin trailing until you are at a point where you are going to profit or breakeven if a reversal occurs. The stop must trail in the direction of your trade and the buffer space it creates should be constant.
In MetaTrader 4, right click on the order you want to set the trailing stop for in your Terminal window and navigate to the Trailing Stop submenu. You can either use a preset pip value from the list or you enter a custom number.
One drawback of MetaTrader 4’s system is that it doesn’t work properly with the extended quotes (extra decimal points) offered as a function of some FX trading brokerage. You also can’t set a stop lower than 15 pips, which is a problem for scalpers. To get around this, you can search online and download a trailing stop expert advisor which you can then load into MetaTrader and use as needed.
Don’t forget that you can still do this manually if you want. It does keep you involved, though it can be inconvenient if you are unable to be near your computer or mobile device. What you can do is look for support and resistance levels and set alerts when price reaches those levels. That’s often a good time to move your stop forward. Plus, while you can’t set an automated trailing stop to vary in buffer space in a logical manner, you can do it yourself as a discretionary trader and be perfectly rational about it. Whatever method you choose to set your trailing stops, do a few demo tests to make sure that it’s the best method for you, since whatever you choose will have some kind of measurable effect on your profits and losses.
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