How to Place a Trailing Stop in MT4
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Trailing stop is one of the classic tools that traders love to use. No rigid operation like stop limit or take profit, trailing stop helps traders minimize risk and maximize profits because it can automatically move the stop loss level in the same direction as the price trend you expect. So what is a trailing stop? How to apply trailing stops in MT4 to get the best trading effect in forex trading? Let’s find out in the guide below.
1. What is Trailing Stop?
Trailing stop is a type of stop-loss order. However, unlike a standard stop-loss order, which is permanently fixed, at any point you cut your loss, the order will be automatically closed when you reach that point. A trailing stop is a dynamic stop loss that always moves in the same order trend. When your Buy order is profitable, the automatic stop loss will move higher by a certain number of pips set up at the beginning. On the contrary, it will move lower if your Sell order is profitable.
In case the price moves in the direction you want, the trailing stop will stand still and turn into a regular static stop-limit tool.
For instance, you place a Trailing stop of 50 pips on the EUR/USD pair after buying at 1.2550. If the price rises to 1.2600, your stop loss will also increase from the initial level of 1.2500 to 1.2550 (50 pips). If the price continues to grow to 1.2650, the stop loss will automatically advance to 1.2600. If the price stalls or turns lower, the trailing stop will become a fixed stop loss at 1.2600.
2. How to set a Trailing Stop on MT4?
- In the “Terminal” window displaying information about the current trandé, right-click the order you want to adjust.
- Select “Trailing Stop” -> “Custom…”.
- Enter the desirable value of the distance between the Stop Loss level and the current price in the list opened to automatically move the stop loss as you like -> press “OK”.
3. Why should Trailing Stop be used?
Trailing stop plays a vital role in risk management. It helps to remove some emotions from the trading process and automatically protects your capital.
Whether you are a long-term or short-term investor, determining when to exit is one of the essential keys to the success of each trade. It is often easier for us to decide to enter a trade than exit it. For example, you have a profit order, you will not want to close it but want to open the take profit a bit more in the hope of making more money. Conversely, if you have a losing position, you will not want to close it but want to try to hold the position in the hope that the price will reverse. Since the trailing stop is an automatic exit, it will always move according to the amount of Profit you have and will only stop when the market moves in your favor.
As a result, you always determine the optimal exit time, which both ensures significant profits and helps you avoid unexpected losses. In particular, your trading will not be affected by negative emotions leading to risks out of control or account fire.
4. How To Set a Trailing Stop Loss Effectively
Stop loss should not be set too tight or too wide
The key to using a trailing stop successfully is to place it at several pips that are neither too wide nor too tight. Setting a stop-loss that is too tight means that the daily market movement will constantly trigger the automatic stop. Thus the trade cannot move in the direction the trader wants, especially with currency pairs with high volatility. Suppose you place a Buy order on the GBP/USD pair at 1.2500, trailing stop 10 pips, ie, when the price only rises to 1.2510, your stop loss will also increase. And when the price has a minor correction, the stop loss will be fixed at 1.2500, and the trade can be closed quickly before reaching the Profit desired by the trader.
A too-tight stop-loss will usually result in a losing trade, albeit a small one. Conversely, a stop loss that is too large will not be triggered by normal market movements, which means that the trader can risk unnecessarily significant losses or overlook more profits.
Some professional traders share that the ideal stop loss distance is around 10%-20% of your entry price.
Trailing stop will stop working if you close the Metatrader 4 platform.
Trailing Stop is executed by the trader’s action, not a static order installed on the server like Stop Loss or Take Profit. Therefore, different from the above commands for the trailing stop to be executed, you must always leave the MT4 software active and not be allowed to turn it off. This means that if you close the MT4 platform, the trailing stop will not work. But Stop Loss price will be recorded at the time you close MT4. Until you rerun this software, Trailing Stop will be active.
Thus, if you still want to shut down, you are required to have a VPS running independently to maintain Trailing Stop.
In conclusion, as the forex market fluctuates daily, it can be challenging to establish an ideal stop loss distance. Thoroughly study the market to maximize your profits and minimize your risks.
A trailing stop is intended to protect gains by enabling a trade to remain open and Profit as long as the price moves in the right direction. The trailing stop should only be applied when you are already profitable and satisfied with the yield of your opened order.