If you want to stay with the trend longer and lock in profits along the way, manual trailing stops should be part of your money management plan, writes Gregory McLeod of DailyFX.com.
Have you ever entered a trade that was profitable by 40 or 50 pips only to have it end up as a loss?
Have you ever taken profit on a trade only to see it go hundreds of pips further?
One technique that forex traders have employed to address these two challenges is the manual trailing stop. Traders can lock in gains as well as participate in the further rise.
Once a trade has been entered with a beginning stop below a swing point, traders will look for price to move to a new high and then pull back to a higher low. This initial move confirms that the trend is on its way as other traders begin to enter and momentum builds. After price makes this new higher high, the stop can be moved up a few pips below the new swing low.
Manual Trailing Stop on 4-Hour EUR/USD Chart
Chart Created Using Marketscope 2.0 charts)
Click to Enlarge
In the above example of a four-hour EUR/USD chart, notice how after the new high was broken, the stop was moved up or “trailed” below the new higher swing low at 1.3647. Now, if price suddenly were to pull back below the swing low and trigger the stop, a profit of 79 pips would have still been pocketed.
Next, the euro made a new swing high in the 1.3788 area before pulling back and the stop is moved up to 1.3740. The worst case scenario is that price falls below 1.3740 and we are stopped out for a 172-pip gain. Being stopped out with a profit beats being stopped out for a loss any day of the week!
Remember that no strategy or method is perfect and stop outs for loss can still happen with the manual trailing stop strategy of money management. So choosing the strongest trends is as important as the entry and money management technique that you employ. So if you want to stay with the trend longer and lock in profits along the way, manual trailing stops should be part of your money management plan.
By Gregory McLeod, Trading Instructor, DailyFX.com
