Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

You are here: Home > Blog > Managing risk with the trailing stop

Managing risk with the trailing stop

January 20, 2018

Good traders always use a stoploss when they open a new trade. You can use a regular stop, but you can also use a trailing stop.

The forex market is characterized by a daily volatility which is higher than all the other financial markets (except for the new crypto currency market). Even a fluctuation of a few pips can cause important losses or profits due to the high leverage.

Setting up proper money management rules will help to avoid difficult situations and will allow you to maintain a reserve capital.

Among the methods used to place stop losses on a trade, the most famous one is obviously the regular and fixed stop loss. In this case the trade will be closed if the price falls below a certain level (or a certain percentage). The stop loss can also be modified at a later time, usually towards the entry point.

However, there is an alternative method of loss control called a trailing stop. This stop will automatically change the stop level when the exchange rate moves in our favour. So this kind of stop will follow the market prices and by doing so it will limit our losses or even protect our gains.

The basic concept of the trailing stop is that it takes into account the last top (low) reached by the exchange rate by moving the stop to maintain an adequate maximum distance from the same level.

The trailing stop is therefore dynamic and it is suitable for those trend following strategies that aim to follow the trend of a market while managing the risk correctly and gradually increasing the stop.

Let's now take a concrete example to understand how the trailing stop in forex works. Let's assume you have opened a long position on EurUsd at 1.2000 with a trailing stop at 1.1960 (a distance of 40 pips); if EurUsd rises up to 1.2040 (so 40 pips), the stop will adjust accordingly going up to 1.2000.

If the market moves against your trade then the stop will be activated automatically, setting a maximum loss already defined at the beginning.

The advantage of this type of operation is evident in a very volatile market such as the forex market. Through the trailing stop you can enter a trade and know that any market situation will occur from that point forward and will not result in losses greater than those expected with the stop loss. The trader will no longer have to worry about manually adjusting the stop loss, but it will be the platform to adapt the stop to the changing of market situations.

Another great advantage of the trailing stop is to remove the emotional component from trading. Very often the trader who constantly follows price dynamics observes the price movement with nervousness, and his emotions prevail. The early closure of the position is a mistake that many new traders make, while the correct rule is to cut losses, but let profits run as much as possible.

The trailing stop is an ideal risk management tool because it achieves this dual objective.


Related articles

Forex and volatility with the ATR

May 15, 2018

The volatility of the forex world is one of those factors that attract a huge number of beginner and professional traders.
Read more


What really drives the forex market?

April 13, 2018

What really drives the forex market? This is a question that is difficult to answer especially due to the complexity of the forex market and all the variables that influence the quotations of a currency.
Read more


Market Movers – April 2018

April 02, 2018

At the beginning of April, we can expect a rise in rates of the Fed, in a very uncertain market moment, especially on the stock market.
Read more


Market movers - March 2018

March 01, 2018

A list of important events that can move the markets in March...
Read more


Forex Strategy with Japanese Candlesticks: the Engulfing Bar

February 18, 2018

For those trading on forex it is essential to understand all the signals that the market offers daily. Technical analysis tools help the trader understand who is dominating the market: bulls or bears.
Read more


Forex Market movers - Month of February

February 05, 2018

There are no appointments in the month of February with the two most important central banks in the world, ECB and FED.
Read more


Forex Market Movers – January 2018

January 02, 2018

Last year closed with important performances that were not seen for a while, especially concerning Euro and Dollar.
Read more


Inflation rate, an important market mover in forex

December 18, 2017

Among the most relevant macroeconomic data for forex traders, inflation must absolutely be included, or even better all the data on production price trends (PPI) and consumption (CPI).
Read more


Forex Market Movers – December 2017

December 01, 2017

December is crucial for the currency market, but not just because of the important meeting of the Federal Reserve scheduled for the 13th.
Read more


Most common mistakes in Forex trading

November 21, 2017

Forex trading can create significant error margins and for this reason the combination of money management, continuous training and common sense is crucial to get the success you want.
Read more


Forex Market Movers – November 2017

November 02, 2017

November starts with the Federal Reserve meeting that should lead to the rise of rates in the month of December.
Read more


Not all exchange rates are the same

October 21, 2017

The Forex market allows each trader to operate not only on major currencies like EurUsd, UsdJpy or GbpUsd (the so-called majors), but also on the so-called exotic cross currencies.
Read more


FX Market Movers – October 2017

October 04, 2017

The month of October is dense with appointments, especially with reference to the news that might come from Central Banks.
Read more


Forex Market Movers – Month of July

June 30, 2017

As always, the month of July represents the antechamber to the month of August, a usually volatile month for financial markets due to the low amount of trades and lower presence of institutional transactions.
Read more


Benefits of trading CFDs

May 21, 2016

What are the benefits of trading CFDs over traditional forms of trading?
Read more


Trading plan: don't trade without it

May 21, 2016

Every trader needs a good and personal trading plan and most important: you have to stick with it.
Read more