Do you want to maximize profits in an open position without having to constantly monitor the market? Trailing Stops could be the secret weapon you need.
This tool is used by traders to gain flexibility in the ever-changing market, allowing them to adjust their stop level according to price direction. Trailing Stops are typically set at 15-20%, providing the potential for significant gains while also keeping losses in check.
It is important, however, to understand the risks associated with leveraged trading products such as Forex and CFDs, and to use other risk management tools, such as Stop Loss, Sell Limit, and Stop Limit.
In this article, we will look at the benefits and drawbacks of Trailing Stops, as well as how to incorporate risk management strategies for the best results.
Key Takeaways
- Trailing Stops are a tool used by traders to lock potential profits in an open position.
- Trailing Stops automatically track the price direction of the currency pair.
- Trailing Stops can be disabled or deleted from all positions if desired.
- Traders find that setting Trailing Stops at 15% or 20% works best.
What is it?
Trailing Stops are a tool used by traders to lock in potential profits from an open position while allowing for flexibility in tracking the price direction of the currency pair, though drawbacks exist such as the possibility of repeated stop level triggers in volatile currency pairs and the cost of opening further trades eating into profits.
Traders may set Trailing Stops at 15% or 20% for optimal implementation techniques, and examples of successful trailing stop strategies include adjusting the stop levels as price moves in the trader’s favor, and adjusting the trailing stop to a lower level when the market is choppy.
It is important to remember to only risk what can be afford to lose and fully understand the extent of exposure to the risk of loss. Trading leveraged products like forex and CFDs involve a high level of risk, and seeking independent financial advice is recommended.
Benefits and Drawbacks
Utilizing a Trailing Stop Order can be advantageous in terms of locking in profits, however it also carries drawbacks such as the potential for repeated stop level triggers in volatile currency pairs. The pros and cons of using this order are worth considering before deciding whether it is the right tool for the job.
| Pros | Cons |
|---|---|
| Automatically tracks price | Possibility of repeated stop level triggers |
| Locks in profits | Cost of opening further trades may eat into profits |
| Flexible | Not completely avoids all trading losses, other risk management tools may be needed |
| Can disable Trailing Stop orders | Leveraged products involve a high level of risk, need to be aware of the extent of exposure to the risk of loss |
| Can set at any percentage | Practicing trading with a demo account is recommended before trading with real money, seek independent financial advice if needed |
Overall, while Trailing Stops can be a great tool to maximize profits, it is important to be aware of the drawbacks and risks associated with this order. It is therefore essential to weigh up the pros and cons before making an informed decision.
Risk Management Strategies
Although Trailing Stop Orders can be a beneficial tool for managing risk, a range of other strategies should be employed to ensure effective long-term risk management.
Position sizing and diversification techniques are two such strategies that can be used to reduce the potential for large losses.
Position sizing involves setting the size of each trade relative to the size of the trading account, and it is important to fully understand the exposure to risk of each new position before it is taken.
Diversification techniques involve spreading the risk across different asset classes, such as stocks, bonds, or currencies, so that a single large loss is less likely to occur.
It is also important to take into consideration the liquidity of each asset class when constructing a diversified portfolio.
By employing a range of risk management strategies, traders can maximize the potential for profits while minimizing the potential for losses.
Frequently Asked Questions
How do I set up Trailing Stops?
Trailing Stops are a helpful tool for traders to manage their positions and lock in potential profits. It is a command that is set on the trading platform, not on the server like Stop Loss and Take Profit orders.
When the trader’s profits become equal to or larger than the specified distance, the command is triggered automatically. Traders may set a Trailing Stop for any position, including shorting stocks, and the ideal distance is 15-20%.
It is important to note that Trailing Stops do not completely avoid losses and other risk management tools such as stop losses or sell limits should also be used. Traders should practice with a demo account before investing real money and seek independent financial advice when necessary.
How often should I adjust my Trailing Stop?
When considering how often to adjust a Trailing Stop, traders should consider the psychology of their trading strategy and the impact of volatility on their positions. Generally, Trailing Stops should be adjusted more frequently in volatile markets and less often in calmer markets. Depending on the strategy, traders may choose to adjust their Trailing Stop daily or weekly.
It is important to note that Trailing Stops should be adjusted only to lock in profits and should not be adjusted to reduce losses, as this could potentially lead to more losses in the long run. Traders should also remember to consider the cost of opening further trades when adjusting Trailing Stops.
What is the best Trailing Stop percentage to use?
The best trailing stop percentage to use depends on the trader’s risk appetite and the reward/risk ratio of the currency pair. Generally, a trailing stop of 15-20% is recommended for most traders since it offers a good balance between risk and reward. With this setting, potential losses are limited while still allowing traders to take advantage of favorable market movements.
However, traders should also keep in mind that Stop Loss orders can also be used in addition to Trailing Stops to further limit losses. Ultimately, the best Trailing Stop percentage will depend on the trader’s individual risk profile and objectives.
Can I use Trailing Stops while day trading?
Trailing stops are an invaluable tool for day traders looking to maximize profits and manage risk. Using trailing stops with precision can be a trader’s secret weapon, allowing for a dynamic risk-reward ratio with the potential for great rewards and minimized losses.
The flexibility of Trailing Stops allows for an active management of risk, allowing traders to adjust to changing market conditions with ease. With the ability to set a stop at any percentage level, traders can quickly adjust their positions in the market to capitalize on potential gains while limiting losses.
By utilizing Trailing Stops, traders can protect their profits and maintain their freedom to take advantage of opportunities in the market.
Are there any other risk management tools I should use in addition to Trailing Stops?
In addition to Trailing Stops, traders should employ risk management tools such as Stop Loss orders and diversification strategies.
Stop Loss orders are placed to limit losses if the market moves against the trader’s expectations.
A diversification strategy is a method used to spread investment risk among different asset classes. This can help to reduce the volatility of a portfolio and to maximize returns.
Traders should also be mindful of their trading strategy and the amount of leverage they are using, as these can also have a significant effect on the risk of a position.
In conclusion, Trailing Stops are a useful tool for risk management, but traders should also consider employing other risk management tools.
Conclusion
The use of Trailing Stops is a powerful tool for traders to maximize profits while minimizing losses. When used in combination with other risk management strategies such as Stop Loss, Sell Limit, and Stop Limit, traders can have a more secure trading environment.
An apt metaphor to illustrate the value of Trailing Stops is that of a boat being pushed by the wind, with the Trailing Stop the sail that is adjusted to make sure the boat doesn’t drift off course.
Data points such as the typical 15-20% setting of Trailing Stops further emphasize the need for traders to practice caution and to understand the risks involved.
Ultimately, the use of a Trailing Stop is an invaluable tool for traders to maximize their profits.
