Trailing stop

According to an accepted definition, a stop-loss is that level which, if exceeded by a currency pair, results in the automatic closing of a position before a target is reached, generating a loss. A take-profit is the level that, if exceeded, determines the automatic closing of the position, generating a gain. Thanks to these tools, a trader can define a priori the loss or gain he makes.

A solution often used by traders in their activity is to adopt the so-called dynamic stop-loss and take-profit (trailing stop). To do this, it is necessary for the trader to identify a percentage of price retracement leading to the closing of the position (primary stop-loss) and a percentage of price advancement (primary take-profit) leading to the choice of a new take-profit and a new stop-loss.

The goal of this strategy is to follow most of the developing trend, protecting at least a portion of the gains that are obtained as the trend progresses. The key strategic variable is therefore related to the choice of the reference percentage, necessary to close the position or to raise the stop-loss level. Theoretically, the choice should be based on the loss a trader is willing to bear or the amount of gain he is willing to give up in order to follow the trend. However, this way the choice would be taken on insignificant values. It is better therefore to choose a percentage that is believed to determine a trend reversal. If this percentage is so high to generate a not sustainable loss, then it means that the chosen operation is not profitable, in relation to the risk propensity of the trader, and it would be therefore not to select.

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Trailing stop

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