I’ve been looking into using trailing stops lately. I think it’s a good way to protect profits. Of course, it’s not easy to determine the right distance from your entry point to the trailing stop. Here’s Wikipedia‘s definition of a trailing stop order.
A trailing stop order is entered with a stop parameter that creates a moving or trailing activation price, hence the name. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price. Trailing stop sell orders are used to maximize and protect profit as a stock’s price rises and limit losses when its price falls. Trailing stop buy orders are used to maximize profit when a stock’s price is falling and limit losses when it is rising.
I’m going to give you an example here. If I buy NZDJPY at 63.50 and place a trailing stop order 30 pips away at 63.20, and the rate comes down to 63.24, the trailing stop won’t be hit, and will stay there at 63.20. However, if the rate goes up to, say, 63.74, then the trailing stop will move up to 63.44 (keeping the 30-pip distance). The trailing stop moves along in the direction of your trade, but stays put if the market price goes against you. Capisci?
