Many of the strategies we have described offer the following way out of the market: when a profit reaches a fixed number of points, half of the position is closed, the remaining part is insured with a stop at the breakeven level (at the opening level of the transaction), after which the trailing stop is started. The option of using trailing is fully justified, but is rarely found in other Internet space strategies. It would seem logical to take advantage of his use, but he also has weaknesses, which we will discuss next.
Trailing stop: advantages and disadvantages of the tool
Trailing stop is one of the functions of the trading platform (in particular, MT4), which allows you to effectively manage the setting of safety orders (that is, stop loss). In fact, this is a stop loss, only dynamic, programmed to change the place of production depending on the price movement.
- Illustrative example: a person ties a rake behind him and goes forward. As soon as he decides to take a step back, he will rest on a rake and fall. Similarly, the trailing stop: it follows the price at a distance set by the trader in the direction of a positive trend. But as soon as the price reverses and reaches the stopped trailing, the transaction will close.
This order allows you to take the maximum profit without the participation of the trader. If the trader had just moved the stop loss to the breakeven level, in the event of a price reversal, he would have lost profit (although he would not have received a loss). But in the case of trailing, almost all the profits would remain whole. Trailing activation occurs when the price moves in a positive direction.
Disadvantages of trailing stop:
- There is a need to install a long distance, which levels the effectiveness of strategies built on earnings due to volatility. It makes sense to put a trailing on a strong trend and in such a way that a random momentary correction does not close the deal. In strategies where the price moves rapidly in both directions in a narrow range, it is not effective. Some brokers specifically put a minimum level limit of 15 points to eliminate its use in scalping.
- Trailing does not work on the broker’s server, but in the terminal, that is, in MT4 installed on the trader’s computer. If the connection to the server disappears (power outage, computer breakdown, Internet disconnection), the trailing will automatically disappear. Because trailing stop must be used together with the usual stop-loss.
Another important feature: the trailing stop is triggered only once per tick (price change). If more than 1 order with a trailing is opened on one asset, then only the most recently opened trailing order is processed.
Turning on and off the trailing occurs in the bottom panel “Terminal”, where you can set the length of the trailing manually. The tool is interesting, but requires skills. The trader must understand at what point it is still worth insuring the position with a trailing, and at what point it is worth taking the risk and staying at the usual foot. Because advice: first practice on a demo account.