What is a Trailing Stop Order?
A trailing stop order is a variation on a stop order: the stop price moves according to parameters you set instead of staying fixed.
You can use a trailing stop to sell if prices drop more than a set level from the highest price traded, or buy if the price trades above a set level form the lowest traded price.
Let's assume you go long EUR/USD at 1.2000 and set a Trailing Stop 10 pips away. If the price rises to 1.2050, the Stop Price will follow the market by 10 pips and settle at 1.2040. If prices suddenly retrace to 1.2040, the order will execute, netting you a 40 pips profit. However, if prices rebound after that, you will no longer be in a position to profit from rising prices.
Pros and Cons of Trailing Stop Orders
- Lock-in your profits.
- No upside if prices rebound.