Trading involves several risks and minimizes them; various trading platforms offer several tools. One such tool is the stop-loss order. It acts as a protective shield for a trader’s capital. It prevents excessive exposure of the trader’s investment. Before the commencement of trade, every trader decides who much capital they are willing to risk should they incur a loss. Then, traders put a stop-loss order at that amount and open a position. If the market moves against their speculations, they will be automatically given the exit when the losses hit the stop-loss.
Just like every other tool, stop-loss orders have their disadvantages as well. They can protect you against unwanted losses, but they are useful only when the market moves in the opposite direction to your prediction. In other words, they cannot protect your losses. For example, you invest $500 and put a stop-loss order at $300. Assume that you make a profit of $100 during one trading day, but the market moves in the opposite direction the next day. The stop-loss order will close your position $300, but it will not be able to protect your $100.
So, what’s the alternative? The answer is trailing stops.
What is the trailing stop-loss order?
A trailing stop-loss order is an order in the trading platform that adjusts the stop price at a fixed percent or the number of points below (for buy position) or above (for sell position) the market price of an asset (forex, stock, commodity, etc.).
How does a trailing stop work?
Using trailing stop traders define trail amount (fixed number of pips or percentage) for stop loss. When the trader sets a trailing stop on the “Buy” open position, then the stop price rises by the trail amount as the market price rises. When the trader sets a trailing stop on the “Sell” open position, then the stop price falls by the trail amount as the market price falls. If the asset price goes in the opposite direction, the stop-loss price doesn’t change. When the price reaches the trailing stop loss level, the trailing stop will close the position.
Unlike a stop-loss order, trailing stops can protect your profits as well. You can set it at an absolute pip number or a defined percentage after considering the prevailing market prices. Trailing stops work on a similar model but in a different manner. You but a trailing stop on your profits. This means that the trade will continue as long as the market prices move in your preferred direction. Once it starts to move in the opposite direction and reaches your defined percentage or pip number, the trailing stop will close the position. This helps in protecting the profits as this tool does not wait for losses to begin.
Let’s consider an example for a better understanding.
Trailing stop example: Imagine that you are following a bullish trend. Here, your trailing stop will go higher whenever there is a new high in the market. The trailing stop continues to trail the price as long as it moves in the desired direction. It will maintain the desired percentage or pip distance that you have selected. If the prices begin to move in the opposite direction, the trailing stop will hold your last profitable position until the prices hit it. It will begin to trail the prices again if they move higher.
The notable difference between a trailing stop and stop-loss is that the latter is placed with a server while the former with a client terminal. What does this mean? It means that you will lose your trailing stop order once your terminal is closed. This will leave you unprotected. This does not apply to stop order as that remains active through and through.
How To Set a Trailing Stop on MT4
To set a trailing stop on MT4, you need to go to the terminal and right-click on the already open position. Then, choose the trailing stop option, and custom set the trailing number of pips or select a predetermined number of pips.
As we can see on the image above, to set a trailing stop on MT4, you have 3 following steps:
- First, you need to select the order that you wish to protect. Go to the terminal and right-click on it. This will open the context menu. Scroll to find the Trailing Stop option.
- A pop-up window will surface, allowing you to choose a pip-distance to the prevailing market prices. These pip-distances are predetermined.
- You can choose the one that you are comfortable with or create a new one by clicking on ‘Custom.’ You only get one trailing stop for one position.
Once your trailing stop is placed, it will be monitored by the terminal. As soon as the prices reach the desired level, a breakeven stop-loss will be employed automatically. From this point forth, the positive movement of the prices will be chased by the trailing stop. If the movement is in the undesired direction, your trailing stop will hold the fort and protect your profits.
If you wish to remove the trailing stop, you can open the menu and select the ‘None’ option. You can also select ‘Delete All’ to remove all the trailing stops from your open and pending orders.
How to set the trailing stop in MT4 iPhone or any cell phone?
How to use the trailing stop on MT4 mobile?
Unfortunately, MT4 mobile apps do not allow to set the trailing stop at the moment. However, traders can open positions and then can set trailing stop loss using a desktop computer.
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