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Employing The Forex Trailing Stop Within The MT4 Forex Trading Platform

By James Roshwood

Republish: EasyPublish™ Published: 20Jun2009 Word count: 684 Viewed: 1670 time(s) Get Free Content For Your Site

The forex trailing stop is an automatic stop loss that you can be set in the expert advisor facility on the Metatrader 4 platform.

It does pretty well what it says on the tin you might say! A guess from the name will reveal that it's a stop loss that moves automatically according to the real time forex prices on the forex market. A stop loss is a target that you set that will enable your MT4 expert advisor automatic software known as an Epert Advisor (EA) to stop you out the trade when it goes against your position and it will prevent you suffering the risk of a much larger loss to your position.

There are several matters that have to be taken into consideration when you make use of the trailing stop facility. It is not unlike using a ratchet in the sense that it can only move in one direction for example it can be set to only move up but not down. When you move into profit, it follows behind, moving up by the same number of predetermined pips that you have set in the same direction as the market has moved. However if the market price falls the stop loss stays locked for the time being at it's current position. Therefore the market can continue rising and you continue to enjoy more profits, but when the forex market pips fall even slightly the stop loss triggers into effect and stops out your position with the profit or loss you have made up until that time.

To show you an example if you open a trade and go long which means you expect the market to rise. At the time of opening the trade you are at neutral that is point zero which means you have 0 pips profit or loss, although in reality you will have probably dropped a couple of pips as this is where the forex broker effectively makes his margin. Let's assume that you have set your trailing stop at minus 30 pips. If you are unlucky and the FX market just drops and continues to do so, the stop loss will trigger and close your trade for you at 30 pips down. If the market rises, the stop loss will rise in line with the market gain after a pre-set price has been achieved.

When the market moves 20 pips in your favored direction, your stop will have moved to 30 pips below that. If the market then retraces and the price hits the trailing stop the Expert Advisor would stop you out with a loss of 10 pips.

If the market rises up to 40, the trailing stop moves up to 10 above zero. You then have a locked in profit of 10 pips. In reality as soon as the market has risen by the same number of pips as your trailing stop in our example by 30 pips then you cannot lose, as the position would be at par with your opening price.

Naturally you could watch over the markets and run this plan yourself, but there is a risk of you failing to make your exit at the agreed moment and therefore taking a greater loss than that which you had planned. Alternatively having to exit your trade whilst the market is still continuing to rise because you have leave your position in order to perform natural function such as sleeping and eating! As long as you continue to leave MT4 running the EA, which is on autopilot, relieves a lot of the pressure that would otherwise be directed onto you in this position.

The volatility of the market, which can be measured using a Vix indicator, is the main factor in your decision as to where you set the trailing stop. Heavy losses may be avoided but at the same time you do not want to have the stop triggered by the normal vagaries and fluctuations in the market. A forex trailing stop that is too close to the starting price will be triggered so often that you could end up making constant small losses. You have to balance risk and reward.

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