Impact of Trailing Stop on the profitability of strategies

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Impact of Trailing Stop on the profitability of strategies

The profitability of trading largely depends on the trader’s awareness of the existing options of tactics when working with orders. The well-known Stop Loss is not much popular but important alternative — Trailing Stop.

Unlike Stop Loss, Trailing Stop is not fixed but floating. Its primary function is to accompany an open position. Therefore, it has a second name — tracking stop. The main value of Trailing Stop is that it helps to get the maximum profit from the transaction (if the price does not turn in the desired direction, the stop order will be triggered).

How to use Trailing Stop?

Trailing Stop eliminates the need to control the level of Stop Loss because it performs this task automatically according to the pre-set parameters (it acts as Stop Loss manager). If the price changes in an open position give profit, the Stop automatically follows the price, and in case of a decrease in profit, the order is not modified, and the Stop Loss remains at the same level (so, possible losses are minimized).

Actually, Trailing Stop is an option, which permits the investor to controls the stops on all positions. It protects the trader’s profit from a sudden reversal of the trend line and market quotes. Trailing Stop can be used for any type of order (Sell or Buy). In this case, the profit or loss resulted will be automatically fixed. Trailing Stop gives an excellent opportunity to limit damages and increase profits, as the Stop follows the movement of the market quotations of the selected currency pair. The position opened on Trailing Stop will be closed only in case of a trend reversal or a significant rollback. Some investors claim that orders opened in this way are much more effective than Take Profit.

Tactical priorities

When choosing the Trailing Stop option, it is necessary to take into account that using Trailing Stop with minimal values is impractical, because the market noise will constantly throw the trader out of the market (Trailing Stop from 1 point is also allowed by brokers). There is no universal value. The main impact factors are the timeframe, trading system used, and trader’s professionalism. The magnitude of errors in the profit is determined by the number of points specified in the Trailing Stop parameters.

Trailing Stop is especially effective on price hikes (such price behavior is characterized by sharp changes, and an unexpected turn will be smoothed by sliding stop). Traders who sell pending orders in the news actively use a floating stop, because it is extremely difficult to predict the reaction of the market to the output of statistical data. Placing pending orders in both directions with Trailing Stop, one can make a profit even when the price reverses and Stop Loss triggers.

It is convenient to set Trailing Stop if you can’t monitor the open positions constantly, as well as in cases of trading on several different assets.

Trailing Stop is an excellent option to get quite a decent profit when news trading. The essence of the use of this instrument in trading based on fundamental analysis doesn’t change. It is also used by investors without setting Take Profit. At the time of the release of essential news, quotes can rise or fall by 100–500 points, if not more. History of trading knew the situations when the quotes increased by 2000–3000 points. In these cases, Trailing Stop helps to catch everything “to the last penny,” in contrast to Take Profit, established in the amount of 300–400 points.

 

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