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Trailing Stop Order
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Trailing Stop is a stop-loss order, which is used to lock in profits. A Trailing stop order is set at a fixed amount below/above the current market price and has an attached "trail" amount. The price of the stop-loss order is adjusted as the currency price fluctuates. If the market price moves in a favorable direction, the stop price changes to follow the price. If the market price goes against the trader, the stop loss price doesn't change, and a stop order will be executed once the stop price is reached. This technique allows a trader to specify a limit on the possible loss without setting a limit on possible gain.

Example:

Assume that you had bought 1 unit of EUR/USD at 1.5400. Market is flat and you set a trailing stop order 20 pips below the market rate at a level of 1.5380 and choose a “trail” number equal to 10 pips.

Consider the following scenarios for different price movements:

1st move:

Price moves from 1.5400 to 1.5410 (10 pips move equal to “trail’ number)

Stop loss level is moved from 1.5380 to 1.5390

2nd move:

Price jumps from 1.5410 to 1.5450 in a gap move (40 pips move; 30 pips over the “trail” number)

Stop loss level is moved from 1.5390 to 1.5400

3rd move: Price moves from 1.5450 to 1.5460 (10 pips move equal to “trail’ number)

Stop loss level is moved from 1.5400 to 1.5410

In above example, first, market moved 10 pips (“trail” number) and a stop loss level moved 10 pips accordingly. Next, market moved 40 pips; nevertheless, a stop loss level only moved 10 pips. Last, market moved 10 pips and a stop loss level moved 10 pips.

In summary, under normal market conditions, when prices change without significant gaps, trailing stop price is adjusted trying to keep initial distance between stop and market price. However, if market is volatile and gaps more than “trail” number in favorable direction (10 pips in above example), stop loss level will only be moved once to the rate calculated as initial stop value plus “trail” number. After any move, a new stop price is considered as a new order with a new pip difference from the new current price. “Trail” number remains unchanged. Therefore, as shown in above example, the distance between stop level and market level for the trailing stop order might change as market price gaps. Knowing this, clients should consider adjusting their trailing stop orders manually if they want to keep original distance.

* Notice on the execution of stop orders: READ HERE