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Trailing Stop Orders: Should You Use Them?

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In case you have already tried any type of stop order, you understand how they contribute to trading automation. However, there is a good chance that there are certain stop order types you do not know about so far. Thus, today, we are going to tell you about trailing stop orders and explain their key characteristic features.

Let us start with a short description of this instrument. It is a type of order, which is used for trading automation, i.e. when the algorithm executes a deal for you according to the parameters specified by you. But, unlike other types of stop orders, there is no exact price when the program must perform a trade. Instead, there is a trailing sum in percentages or points, which trails (or follows) a current market price as it moves upward or downward. So, when it happens that the direction of the market price fluctuation is favorable for you, the trailing price follows it. In the reverse situation, it does not change. When the actual market value coincides with the trailing stop price specified, the program initiates a market order and executes a purchase or a sale at the best available rate.

Now, let us explain to you how to apply this function in practice using a trailing stop sell order as an example:

  1. Make sure your trading platform supports trailing stop orders. If it doesn’t, consider switching to another source. Our favorites are Interactive Brokers and Robo Forex.
  2. Create a sell order.
  3. Determine an optimal trailing amount, which must be below a current market price.
  4. Submit the order.
  5. If the market rate moves upwards, the trailing price will automatically adjust.
  6. But, if it moves downward, that will be a trigger for a program to complete a deal and to prevent your potential losses from further growth.

When you use a Metatader platform to set such an order, you just need to find the command with the corresponding name in the context menu for the open position in the terminal. Then, you will need to determine an optimal distance between a current market rate and a stop loss limit in points. Afterward, the terminal will analyze the position opened to check whether it is profitable based on the most recent price movement and to perform the corresponding operations as it is described above.

In sum, a trailing stop order is a convenient solution for those, who prefer to automate their trades, but do not want to miss potential profits or bear excessive losses due to unpredicted market changes. Yet, as with any other instrument, it has certain drawbacks and can provoke additional losses, due to unfavorable market conditions. Thus, we recommend you combine it with a standard stop-loss order, which will effectively minimize those risks.