FOREX TRADING LESSON 2

This week I said that I will be talking about the forex exit strategy trailing stop

TRAILING STOP

The trailing stop as part of the forex exit strategy is a stop that moves in the direction of trade, which is up for a long trade and down for a short trade. An ideal stop is one that allows enough room to move and hence allows profit to run and of course eventually gets you out when the trade does turn against you. We use exit stop loss to trail the market but in case the value of the exit stop loss will be positive in terms of profit pips. Lets take a look at a trade example to illustrate the trailing stop:

At 1.00p.m we saw a good long trade opportunity for EURUSD at 1.3560 and we decided to take it, our order will look like this initially:

Position: [buy]

Instrument: EURUSD

Entry price: 1.3560

Exit stop loss: 1.3530

Exit target: ---------- [blank in this case as we intend trailing the market instead of using a fixed target value]

After 30 mins that was 1.30p.m, our initial trade was now in a profit with 25 pips .we decide to trail it by moving to a no risk position. Because the gap between the initial price [1.3560] and our current market price [1.3585] which is 25 pips from the open is very small, we can only lock out about 5pips from the 25 pips current profit to allow room for movement. Our exit stop loss should be moved from the initial 1.3565. By 1.30p.m our adjusted order should look like this:

Position: long [buy]

Instrument: EURUSD

Entry price: 1.3560

Exit stop loss: 1.3565[compare this value with the entry price]

Exit target: ----------- [blank in this case as we intend trailing the market instead of using fixed target value]

We only lock out 5 pips from our profit of 25 pips because we wanted to create more room for the market to move. If you move the trailing stop too close to the current market price because you wanted to lock out more profits, the trade will most likely close out as there will be less room for it to oscillate.

After another 2 hours, the market rose to 1.3620, which is 60 pips, gained from the previous entry of 1.3560. Now we will need to move our trailing stop closer to lock out more profit. Remember we must leave enough room for the market to move. We will lock out 40 pips from the 60 pips profit we will again adjust our exit stop loss upper to 1.3600[add 40 pips to the entry price]. Our trade will now look like this:

Position: long [buy]

Instrument: EURUSD

Entry price: 1.3560

Exit stop loss: 1.3600[compare this value with this entry price]

Exit target: ----------- [blank in this case as we intend trailing the market instead of using fixed target value]

           The process goes on this way until the market finally stops moving in your direction. The trailing stop helps the trader to take larger pips from fast trending markets. Range bound traders mostly use fixed stops.

well i will stop for now but i want to be assure that you are already on the demonstration account i will continue from here so keep visiting