Forex Trading Education - Should you Use a Trailing Stop Loss?

By: Harold Hsu

There's a gross misunderstanding about trailing stop losses that cause many amateur traders to misuse it... resulting in them losing money unnecessarily without even knowing why!

Trailing stop losses are often used by amateur traders because they believe it maximizes profits and reduces losses. While this may be possible in theory, in practice this is rarely the case. Allow me to elaborate a little bit more...

Why Trailing Stop Losses Are Rarely Useful

According to my own trading experience, as well as the trading experiences of many profitable traders, trailing stop losses often lower the profit potential of a good trade.

You see, the currency markets rarely trend cleanly: they tend to retrace several times during a big move, and there's often a lot of 'noise' and 'whipsawing' as they trend.

During a major retracement in a trend, it's very common for your stop loss target to be triggered just before prices resume with the original trend. This prematurely limits your profit potential and you'll be often left with only a small piece of the profits.

But!

Trailing stop losses do have their uses... but I'd strongly suggest that you use them only if you're very sure about what you're doing. I would advise only expert traders to use this advanced tool.

Perhaps a better way for you to take advantage of a trailing stop loss is to only use it once during a trade: you can manually shift your stop loss level to your entry price when the market price moves in your favour.

At least in this way you won't suffer a loss no matter what. But if prices continue to move up, try not to move your stop loss any further up... doing that will only limit the possible profit potential.

Foreign Exchange
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