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What Does Trailing Stop Mean?

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As we define in the previous article “What is stop-loss order“, a stop-loss order is an instruction placed with a broker to buy or sell a security by setting a stop loss level, a specified amount of pips away from the entry price.

The stop-loss price level can be fixed but it can change too. So, What is the trailing stop order?


A trailing stop or trailing stop-loss is an order that moves the stop-loss price level with each new price tick by the trial amount or trailing stop loss percentage away from an asset current market price. For BUY trade, if the security price rises, the stop price rises by the trail amount, but the stop-loss price doesn’t change if the security price falls. For the SELL trade, if the security price is going down, the stop price fall by the trail amount, but if the security price is going up, the stop-loss price doesn’t change.

What is a trailing stop quote? A lot of brokers use the term trailing stop quote to make it clear that the stop order will only be triggered once a valid quoted price level in the market has been met, without negative slippage.
In that case, if we have a BUY order and EURUSD has a 1.3 price level stop loss, the order will close exactly 1.3 or above 1.3.

Trailing stop BUY example: If we buy the asset at $100 and set a trailing stop to be $10 from the beginning price then when the price goes to $102 my new stop loss will be $102-$10=$92. If the price goes to $150 then my stop loss will move to $150-$10=$140 etc. Instead of a fixed dollar amount, we can use the percentage.

How does a trailing stop work in forex

The reality is that several traders realize that they should accept their losses and let them go as quickly as possible. On the other hand, they also have been told that they should let their profits continue to flow for an extended period. Yet, if someone is not aware of a tool to aid one in implementing this strategy, it is necessary to understand how to use trailing stop in forex. It is quite similar to the application of the usage of a stop order that is regular, but it can be placed to flow with the market.

Take into consideration, for example, if you desire to ride along with the EUR/USD, then you place an emergency stop that will undergo a phase of triggering if the market happens to not move in your favor. Following the passing of a day or a few more, when the trade is tending toward your turn, you desire to conduct a locking in some profit to find out what will occur. It is possible to place a stop in the territory of a positive gain. This could be seen as the placement of a trailing stop. If there is the continuance of the market flowing toward your favor, the profit you have locked in will increase. This will be an ongoing favorable situation until the market slides back in a downward trend and reaches your stop placement.

The trailing stop’s critical role is to engage in the augmentation of the profit lock while the market is in a moving phase. As such, there is no requirement for you to engage in interventions or make adjustments. The trailing stop’s functionality permits you to engage in following trends with a level of safety in your preferred comfort zone so that there is no need for constant monitoring.

Regarding the trailing stop, you can also engage in the trailing stop placement for the sake of longer-term trading. You can place your stop far removed from the market trend and permit things to undergo development. This works rather successfully for slow trading systems, which tend to engage in the locking in of profits for extended months or days. When someone participates in setting up a target that is long term, then it is truly advised to place a trailing stop as well. This will permit the person to set up the total trade at an early stage while granting it the freedom to take its route.

With the reality that the forex market is running for a time frame of twenty-four hours over six days each week, this results in the need for many hours to undergo monitoring. Instead of enduring a lack of sleep or interrupted sleep, it makes wise sense to apply the trailing stop to one’s trade in this case. The remarkable result is that the lock of your profit can increase even when you are soundly asleep. The market will continue to go on as it does, while your trade will be able to conduct any needful adjustments or stops.

Disadvantages of trailing stop loss
Some traders advice to avoid trailing stop loss because they are automatic.
Automatic trailing stops loss move stop loss always per defined number of pips or percentage without an analysis of the current market situation. For example, an automatic trailing stop loss can move the stop price level for 15 pips all the time even that market has 100 pips daily volatility (ATR) or 250 pips daily volatility.

Static stops are great for novice traders as, along with making them aware of this tool, they also help them understand risk management. Trailing stops are for those looking to maximize their profits and have already learned the other concepts. This type is about money management rather than risk management. These stops are not stationary and move as the trades move in favor of the trader.

Here’s an example of your understanding. Let’s assume that a trader has taken an extended position and is trading EUR/USD at 1.3200. The pip stop is at 1.3150, with a 100 pip limit at 1.3300. Consider a situation in which this trader decides to move up to 1.325o; he will adjust the stop up to 1.3200. This 0.050 up the original stop value. A trailing stop moves to the entry price of the trader or the breakeven price. This means that if his chosen currency pair reverses and moves against him, the trailing stop will protect the gains that he made at his original position.

Traders can remove the initial risk by using this break-even stop permit. They will feel protected and can move to other Forex trade opportunities. The trailing stop has different types; the easiest one to work with is a dynamic trailing stop. It adjusts the stop for every single pip that will move in favor of the trader. Taking the same example mentioned above, if our currency pair moves to 1.3201 (1.3200 being the starting entry), the stop will automatically adjust to 1.3151.

How the best way to use trailing stop?

If you want more control over the stops, you can always move them manually. Experienced traders who like to trade in a fast-moving market or do trend trading often move the stops manually. This is because the price action is critical in this kind of trading.

Trailing Stop after hours

So, do trailing stops work after hours? Trailing stop orders won’t execute during after hours, the extended-hours session. The trailing stop orders that traders set during extended-hours will queue for the market open of the next trading day. This trailing stop after-hours rule applies to any trading platform or trading broker.

Should you use a trailing stop loss?
Trailing stop loss can be an interesting strategy in trading but traders need to avoid a completely automated trailing stop process. The best results traders can get if they manually set trailing amount or percentage based on current market conditions.

Forex Technical Analysis for Beginners

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As a forex trader, you may have thought of various ways in which you can enter and exit a trade at the right time to gain profit, right? One of such ways is forex technical analysis. Forex technical analysis is very popular among the market players and can be done by using charts and trade indicators. Though if you are new to this field, this article will clear all your doubts about forex technical analysis and how it can help you predict the market trends.

Forex Technical Analysis for Beginners

Technical analysis helps in analyzing market price movements through the historical charts and indicators so traders can get a hold of future market trends. It uses past trends to predict future trends and market performance before entering a trade. Various candlestick patterns or charts help form indicators. A forex trader uses mostly price and volume data in technical analysis.

The difference between the fundamental and technical analysis lies in the fact that while fundamental analysis considers economic changes and related aspects as the primary contributor, the technical analysis considers past trends. A trader needs to be aware of the basics of fundamental and technical analysis so that he/she can take advantage by combining them.

Benefits of Using Technical Analysis

Technical analysis is an excellent tool for risk management to prevent downside risk. By understanding the principles and various concepts of forex technical analysis, traders can develop their own suitable strategy to trade different currencies. Unlike fundamental analysis which helps derive at the intrinsic value of the market, technical analysis helps in finding trends and patterns caused by the fundamentals changes.

There are three main benefits of implementing technical analysis in forex trading.

  •       It can be used as an indicator to enter and exit the market.
  •       It can be used at any market time frame.
  •       It helps in identifying the trends of the market.

Forex technical analysis Tool – Charts

Historical charts are very useful in forex technical analysis. A chart consists of two things, the past and the present price of the market, which is the starting point to decide how profitable trade can be. The market price is the most significant representation of the market and thus holds the most importance.

Technical charts can help derive the overall market trend to decide whether the market would soar or slump over any time frame, including hourly, daily, weekly, or even monthly frames. Prices are monitored in various candlestick patterns (for example cup and handle pattern) or charts which are known as price ranges as well.  The commonly used charts in current times are bar charts, candlestick charts, and line charts.

A technical chart has four main points – the opening price, closing price, high point, and the low point. The relationship between the prices and the pattern can give signs to traders for entering and exiting trades. By understanding the basics of forex technical analysis, beginners can implement and combine the charts and indicators to forecast the future.

What is Forex Technical Analysis Indicators?

Forex technical analysis indicators are useful when a trader is looking to get an opportunity to trade. Most technical analysis indicators are based on volume and price, just like the charts. Though indicator aids in finding the support and resistance levels and how long a trader should hold the trade. By utilizing multiple time frame analysis for price or volume-based ranges and changes, a trader can get the current market perspective.

These are some of the most used forex technical analysis indicators,

  • Relative Strength Index (RSI)
  • Moving Averages
  • Moving average convergence divergence (MACD)
  • Bollinger Bands
  • Stochastics
  • MACD

While MACD and moving averages are key for finding market trends, RSI is for identifying the entry and exit points.

The most important step is to read a good technical analysis books:
Technical Analysis of the Financial Markets, by John J. Murphy
This book is written in a language that is very easy to understand, you should read it along with the first book so you can understand its content fully. This is the best book written about forex and stocks trading in my opinion. This is University book.

Let start the basic things in technical analysis:
1) Oscillators technical indicators

2) RSI Oscillator
In this video you can learn everything about RSI and how to use in analysis:

3) Trend lines as important tool in trading for each beginner trader is presented below:

4) When you learn trend lines the next thing is to learn are Fibonacci levels which are presented in video below:

5) Next thing that novice traders need to learn are candlestick patterns that are presented below in video:

These are major things in technical analysis to learn.

Conclusion

As a beginner in the forex market, you can also keep yourself updated with the latest trends, news, and events happening across the globe. It would give you a good edge over your trades as the forex market is highly sensitive to global events.

As a novice trader, you are advised to trade on a practice account and can try different technical analysis patterns and tools on those dummy systems to learn new things. By doing so, you would make mistakes but won’t lose your actual money. You can find such demo accounts from brokers across the world as it has become a trend in current times.

You should also not fall in any “Get your profit doubled in a month” kind of scams (read our article about forex scams) as there is nothing in this world that gives you easy money without skills and hard work involved. In the end, it’s about how much you are passionate about trading, how much knowledge you have, and how much you are willing to learn through your mistakes.  

Net Debt-to-EBITDA ratio in Simple Words

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Most businesses do not make enough money initially to pay their business expenses like salaries, rentals, purchase equipment, and supplies for their functioning and growth. They will usually borrow the funds which they require for running their business from banks and other lenders. In other cases, established businesses will also borrow money from their lenders. Giving a loan is always risky for a lender, because there is a risk that the borrower may not repay the loan, and the lender will lose the money. Though the lender is usually asking for collateral, they will also want some information about the business finances.

The net debt-to-EBITDA ratio is a debt ratio for some companies that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. The goal of this ratio is to represent how well a company can cover its debts. The difference between the debt-to-EBITDA ratio (DTER) and net debt-to-EBITDA ratio (NDTER) is that net debt subtracts cash and cash equivalents while the standard ratio does not. This ratio can be negative if the company has more cash than debt.

Let we learn in practice how we can use the Debt / Equity Ratio and Enterprise Value:

EBITDA

Before approving the loan application, the lender would like to find out more about the business profit margins, whether it is making enough money to repay the loan according to the repayment terms specified. One of the main parameters used to measure whether a business is making enough profit is the earnings before interest, taxes, depreciation and amortization, abbreviated as EBITDA. The interest and taxes can be substantial for a business and reduce the money available for making further investment. The depreciation and amortization expenses are non-cash expenses and some lenders do not consider these expenses while assessing whether the business can repay the debt.

Debt

For a business the debt is the amount which the business owes the lenders. The business may have loans which have to be paid over a longer period of time, which may be five years or more. This is the long term debt of the business. The business may have also raised funds by issuing bonds or borrowing from others for a shorter period of time, usually a few months or years and this is called short term debt. The total debt of a business consists of the long term and short term debt of the business. If a business faces any financial problem, repayment of the debt is given first priority, hence it is an important parameter for calculating the credit rating of a business.

Debt/EBITDA ratio formula

One of the popular parameters for determining whether a business is likely to repay the debt is the

Formula:  Debt to EBITDA ratio = Debt / Ebitda

where debt is the total debt consisting of both the long and short term debt, and the EBITDA is calculated from the earnings of the business using the financial parameters described above. Both the debt and EBITDA are specified in financial statements of the business like the profit and loss statement, the balance sheet for a particular period. The ratio is also calculated periodically.

Net debt/EBITDA ratio formula

Often the business may have raised funds using short debt and has not used these funds. These funds are cash or cash equivalent for the business. If required the cash equivalent or cash can be used to repay the loans and other debt of the business immediately. Hence it is more relevant to calculate the

Formula: Net debt to EBITDA ratio (NDTER) = Net debt/EBITDA

where net debt = debt – (cash + cash equivalent)

Most borrowers prefer to use the net debt for calculating the ratio since it is the amount that is actually owned by the business and has to be repaid.

Typical value for  Net-debt to EBITDA

The Net-debt to EBITDA ratio is an important ratio for investors and lenders to a business. It varies to a great extent depending on the business model and industry sector. This ratio is calculated periodically from the financial statements of the business. Most companies publicly declare their financial statements quarterly and annually, though the statements may be prepared internally, monthly. Usually, a low debt/Ebitda ratio is preferred for a business since it indicates that the business can easily pay off the debt in a few years. Typically for a well-run business, the ratio is usually 3 or 4. If the ratio is more than 5 , it could be a matter of concern. In some companies, the amount of cash and other cash equivalents is more than the debt of the company. So the net debt/EBITDA ratio may be negative in cash-rich companies.

Sector-wise variations

Though lenders usually prefer businesses with a lower debt/EBITDA ratio, they should realize that the ratio depends to a large extent on the business model and industry sector. Some businesses do not require much capital investment so the ratio of these business will be lower. On the other hand, other industries especially in manufacturing require a huge amount of investment in equipment and machinery. Hence companies in these sectors will usually have a higher ratio. So while calculating the credit rating of a business, the industry sector should also be considered.

Getting loans

Banks and other lenders will check the credit rating of a business before lending any kind of money to it. They will usually not lend money to business which has a low credit rating or may charge a higher interest rate for lending the money. The terms for the loan will also be more stringent. One of the most widely used parameters for determining the credit rating of a business is the debt/EBITDA ratio. The lender will usually not give a loan to a business whose ratio is more than 5 unless there are some other factors that are considered. This may be specific industry sectors with higher capital, and also startup businesses. The lender may also specify that the borrower should maintain the debt/EBITDA ratio below a particular level in the terms and conditions of the loan. If the borrower is unable to maintain the ratio, the lender may initiate action against the borrower or demand immediate repayment of the loan.

Analysis for debt/EBITDA ratio

It is also recommended that a business, debtors, and investors should monitor the net debt and debt/EBITDA ratio over a period of time since it offers valuable insights into the functioning of the business. If the ratio is reducing over a period of time, it indicates that the business is paying off the debt, so the debt is decreasing, while the income is increasing or remaining the same. On the other hand, if the debt is increasing, it implies that the business is borrowing more for growth or expenses, and its income is not increasing in the same proportion. Business owners, investors, and debtors should analyze the variation in the ratio over a period of time and then make a decision accordingly. For example, investors may increase their stake in the business if the ratio is decreasing and sell their stake if the ratio is increasing.

What is annual EBITDA?

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Have you been wondering what annual EBITDA entails due to hearing discussions about it recently? When you hear reference being made to the term EBITDA, this refers to earnings before interest, taxes, depreciation as well as amortization. This is defined as a metric that is applied for the sake of being able to conduct an evaluation of the operational performance for a business. It also has the potential to be viewed as a proxy in relation to a cash flow concerning the whole process of the operations of a business.

Annual EBITDA for any measurement year means consolidated net income before interest, taxes, depreciation, amortization, extraordinary items, LIFO Income and Expense items, the management fees. Usually, annual EBITDA means the consolidated adjusted EBITDA for the applicable fiscal year ending December 31. Annual EBITDA means EBITDA for the most recent financial year, as identified in the consolidated financial statements.

Annual EBITDA simple explanation video:

The metric of the EBITDA poses as a varied operating income, which is regarded as EBIT, which is noted to provide the exclusion of expenses that are non-operational as well as some types of expenses that are categorized as being non-cash. The reason for the usage of such deductions is to engage in the removal of the elements that business owners tend to hold discretion over. Such elements are noted as being the structure of capital, financing of debt as well as methods of depreciation. It is further noted that this does relate to taxes to some degree. This can be applied for the sake of demonstrating the financial performance of a business with no need to take into consideration the capital structure of the business.

Annual EBITDA detailed explanation video:

When there is the usage of EBITDA in terms of business, it is realized that the approach is to place a concentration on the decisions pertaining to the operation of a business prior to giving consideration to the impact that is made by leverage, capital structure as well as items that are considered to be categorized as non-cash. Such items take into account depreciation.

It is worthwhile to note that this is not a metric that is recognized as being in usage according to the perception of the IFRS as well as US GAAP. The reality is that there are some who are investors, such as Warren Buffet, who holds a rather strong dislike in relation to the usage of this type of metric. This is due to the fact that the metric does not take into consideration the issue of the depreciation for the assets of a business. Take into consideration, for example, the fact that in such cases that a business possesses a vast quantity of equipment that is depreciable, which naturally is regarded as also holding an enormous level of expense in terms of depreciation, then the reality is that there is no recording of the expenses that are associated with the sustenance and maintenance of particular capital assets.

In terms of reference being made to interest as it applies in the scenario of the usage of EBITDA, it is not included in the placement of EBITDA. This is due to the fact there is a reliance on the structure of the funding pertaining to a business. This is retrieved from the funds that are borrowed by the business in order to provide finances to allow the operation of the company. It is understandable that various companies tend to possess capital structures that are noted as being diversified, which thus causes the emergence of different expenses related to levels of interest. That is why it is considered to be more straightforward to engage in the conducting of a comparison of the respective performance of businesses when there is the addition of back interest while not giving consideration to the contribution of the capital structure in relation to the business. Do give consideration to the fact that payments for interest are regarded as being tax-deductible. This provides the indication that corporations can benefit from this scenario when there is the application of what is referred to as a tax shield at the corporate level.

Then when there is the reference to taxes as applied to the usage of EBITDA, there is the truth that there can be variations in regard to taxes. Thus, it is acknowledged that the rate of taxes is based on the location concerning the operation of the business. Taxes are regarded as being functionality in relation to tax rules. Taxes, however, are noted as not being truly a component that is utilized for the purpose of conducting an assessment of the performance of the management team. With this perspective in mind, it is realized that the majority of analysts in the financial sector tend to hold the preference to engage in the addition of them again in such cases that there is the conducting of comparisons of various companies.

For the issues of depreciation along with amortization, there is a reliance on the historical investments which have been conducted by the business. Therefore, there is the comprehension that there is no reliance on the operation performed at the present time. Businesses are recognized as placing investments into assets that are fixed and long term, which are known to emerge in a loss of value as a result of much usage for an extended period of time. Such assets tend to include vehicles as well as buildings. It is noted that the expenses that are associated with depreciation are founded on part of the deterioration of the assets that are tangible and fixed. On the other hand, expenses that are regarded as being associated with amortization are incurred in such cases that the asset is regarded as being an intangible item. A patent is an example of an item that undergoes amortization due to the fact that it possesses a life cycle of usefulness that is recognized as holding a time limitation prior to a date of expiration.

Depreciation as well as amortization are deeply impacted by the perceptions concerning the usefulness of the economic life of assets, the value concerning salvaging, along with the method of depreciation that is applied. Due to this principle, analysts may discover that the income for operating the business is actually not the same as what they perceive the number should indicate. That is why depreciation along with amortization is not part of the calculation process when EBITDA is applied.

Absolute Drawdown

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So this is the question: What is Maximum, Absolute, and Relative Drawdown?

Absolute Drawdown Definition

The absolute drawdown refers to the sum difference between the initial capital risked and a minimal point below that level. This measures the amount of initial risk involved in the investment. The absolute drawdown shows how big is loss compared to the initial deposit during the trading. If the absolute drawdown value is 0, for example, this means that no capital was at risk.

Formula: Absolute Drawdown = Initial Deposit – Minimal Equity

Absolute drawdown forex example

absolute drawdown

As we can see the distance from $10 000 till $7000 is $ 3000 and it is the distance from the initial balance till value below the initial balance.

Absolute drawdown vs. maximum drawdown vs. relative drawdown

Drawdown, in its most basic sense, refers to the relative risk involved with a certain securities investment.
When faced with any investment decision, it would be wise for investors to consult as many and as varied a number of indices as possible before making that purchase or sell. One of the most critical sets of indicators is the general capital trend associated with security.

In this article, we will explain the concepts of maximum, absolute, and relative drawdown as those terms relate to securities trading.

In its simplest sense, the drawdown refers to just how much you could lose with a certain investment thus it makes it a relatively strong indicator of the overall risk of a security.

For example, if you risk $100 and lose $50 your drawdown is 50% because you have lost half of the value of your initial investment. To put it in the simplest terms, the drawdown is the difference between a high in the capital and a low point in the capital value.

The drawdown is the difference between maxima and minima on your Forex chart. This measures the amount of risk-loss involved in your proposed security trade. This number is further divided into maximum drawdown and absolute drawdown. We will explain those terms now.
It is important to understand that draw-down is important when you need to choose PAMM provider or to choose Zulutrade signal provider

Absolute drawdown vs. maximum drawdown

The maximum drawdown refers to the difference between a local max and the next minimum in your chart. This spread can show you potential profit value locked in the trading pair you have selected. If the maximum drawdown is higher than the profit potential of the currency pair, it might not be an investment that you want to consider. One of the most central strategies that traders use to guide them when it comes to this number is determining a ratio that the trader is comfortable with and avoiding trading pairs that vary wildly from that dynamic.

Maximal Drawdown = Maximum distance (Maximal Peak – next Minimal Peak)

absolute drawdown vs. maximum drawdown

SO we need to find the highest high till lowest low in trading balance $16000 – $7000 = $ 9000.

Absolute drawdown vs. Relative drawdown

Relative drawdown is the maximal drawdown percentage shows the ratio between the maximal drawdown and the value of respective local upper extremum (of equity)

Relative Drawdown = MaxDrawDown % = Max Drawdown / its MaxPeak * 100%

absolute drawdown vs relative drawdown

Conclusion

Forex trading often relies upon keen intuition and interpretation when it comes to charts and data as relating to the drawdown. Because of its highly volatile nature – or its tendency towards wide swings in some currency pairs – having a keen sense of risk is often the most powerful tool an investor has in their arsenal.

Most important thing is to measure Maximum Equity Drawdown because this is the most important criterion when we want to measure a good portfolio. If we look only balance, a lot of traders who do not put stop-loss or use wide stop loss will avoid showing real equity drawdown which can bring huge problems to investors or traders’ minds. The worst thing is when the trader thinks that he has excellent strategy and strategy is risky because of the huge equity drawdown.

Absolute drawdown is an excellent measure when we want to see our performance in the first months of trading and when we compare with initial balance but for long term portfolio analysis maximum and relative drawdown are much better solutions.