What is Trailing Stop loss? How to set a Trailing Stop loss on eToro?
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A trailing stop loss is a helpful tool for investors & traders to protect their profit if the price does not move in the right direction. Learning how to use trailing stop loss may be beneficial to your investing, and you can decide whether it is worth using in your trading strategy.
1. What is Trailing Stop loss?
A trailing stop loss is a risk management tool that allows traders to adjust the stop price at a fixed percent or amount of pips above or below the market price, depending on whether the position is BUY or SELL.
As the price moves in your favor, the stop loss will move with it, maintaining the same locked-in pip distance from the current market rate (This is why it is called a ‘trailing’ SL). However, if the price changes direction, the stop loss will not change, and the trade will be closed if the stop loss rate is reached.
2. How does it work?
A trailing stop-loss order is almost in the same manner as a regular stop-loss order. A trailing stop loss only differs from a regular stop loss in that it moves whenever the price moves in your favor.
Specifically, for a Buy position, the Trailing stop loss will rise with the price in 1-pip increments, and for a Sell position, it will fall with the price in 1-pip increments.
For example, you open a Buy EUR/USD trade at 1.1000, set the Stop Loss rate at 1.0900 (100 pips Stop Loss), and activate the Trailing Stop Loss on the broker’s platform.
For each pip that the EUR/USD moves in your favor (e.g 1.1001) the SL level will update accordingly (e.g to 1.0901). If it moves another 50 pips in your direction (1.1051) the SL will be updated as well (1.0951).
However, if the EUR/USD then moves back down to, for instance to 1.1020, the SL level will not change and it stays at 1.0951. Only once it moves above the highest point it has been at (1.1051) the SL continues to update.
If the price continues down and reaches 1.1051, the trailing stop-loss order would be executed to a market order, and you would be able to exit the trade.
3. How to set a Trailing Stop loss on eToro?
When trading on eToro, you have the option to set a Trailing Stop Loss as soon as you open a trade or at any time after that.
All you need to do is click ‘Stop Loss’ in the Open Trade window and tick the Trailing Stop Loss checkbox underneath it.
Every time you edit your Stop Loss manually while Trailing Stop Loss is enabled, the pip distance between your stop loss rate and the current market rate will be updated accordingly.
If at any point you decide to enable or disable Trailing Stop Loss for an existing trade, click on the blue settings icon at the far right of the trade line in your Portfolio in order to bring up the Edit Trade window.
In conclusion, trailing stop loss is intended to protect gains by enabling a trade to remain open and continue to profit as long as the price moves in the right direction. The trailing stop loss should only be applied when you are already profitable and satisfied with the profit of your opened order.
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