We can only properly explain trailing stop by first touching stop loss.
The Stop Loss is one method in forex which commonly used methods to limit the amount of loss from a currency pair which is declining. When you use Stop Loss Order, you will choose the value of the biggest or maximum loss you are willing to suffer on your trade. When the current price drops below this value, the stop loss will now become a market order and will be automatically executed. So the moment the market price falls below the stop level, the position will be automatically closed at the current market price, this way further losses are avoided. So now let us move on to the Trailing Stop.
A Trailing Stop is a stop loss order that moves (better said as trail) a stop in your direction by a chosen value provided the market is moving in a favorable direction. We have Two Types of trailing stops. They are Dynamic and Fixed Trailing Stops.
Explaining the trailing stop further, we see that you can set a stop in positive profit area, thus making it a trailing stop. Now when the market continues to move in you favour of your direction, your profit lock will rise. This will not stop until the market turns around in the other direction and then touches your stop.
The main essence of the trailing stop is increasing your profit lock as the market moves; this removes the need for you to come in and adjust. With this in place, This you can follow trends in a safer way so that you don't have the need of watching over your trades too constantly.
A trailing stop and a regular stop loss appear similar as they equally provide protection of your capital should a currency pair's price begin to move against you, but that is where their similarities end.
The trailing stop provides a powerful use in that it is more flexible when compared to a fixed stop loss. It is a better means for the fact it allows the trader to keep on protecting his capital if the price falls. Then immediately the price rise, the trailing feature starts again helping you safeguard your profit at the end while still bringing down the risk capital your capital is exposed to.
To understand this better, let us take another practical example: at a price of 1.3000, I opened a long EUR/USD position and I set a trailing stop order for say 20 pips. So now, the trailing stop is located at 1.2980. So now, if the market moves in my direction and the EUR/USD pair is now traded at 1.3040, then the trailing stop relocates itself in accordance, and is now placed at the 1.3020 level. The good thing about this is that it will never go less than its highest high. In my case on, the worst it can get for me is that it will close the position if the pair will get to the 1.4020 level again, so that I get a 20 pips profit. This is the way the trailing stop works.
What is a Trailing Stop in Forex
