Day trading in the forex market gives you a lot of opportunities to profit if done in the right way. The currency market is known for its fast-paced price movements and high trade volume, which supplies enough liquidity for placing trades freely. Day trading is an ideal strategy for anyone patient enough to monitor the hourly charts to make small profits from several closed trades by the end of the day. Day trading can be tricky at times, which is why many traders make use of trading tools to determine certain values like position size, leverage, pips and P&L. In this article, you will learn about trailing SL, which is optional in day trading but can be a great tool for managing risk.
Basics of Trailing SL Order
Before we talk about trailing SL orders, we need to be clear about the term SL or stop loss in trading and what it means by placing a standard SL order. Just as the name suggests, stop loss is an order placed to put an end to the loss that happens in a trade. Each and every trader has a different risk appetite, and the position of SL will be determined based on this risk tolerance. When the price hits the set SL level, the trade position will be closed automatically to save you from further losses.
A typical SL is fixed, and the automated exit will not be triggered until the set SL price is reached. On the other hand, a trailing SL is not stagnant, and it can move so that traders can lock the profits. Traders can use a profit calculator to measure the exact gains in the base currency. Trailing SL totally favours the trader in any situation, which makes it the best type of SL for a day trader in many ways. The concept of trailing SL will be more clear with an example.
Difference Between Normal SL and Trailing SL
Imagine you buy the GBP/USD currency pair at the price of 1.12000 and expect the price to increase further, which makes this a long position. Now, you have placed the SL a few pips above the entry price to minimise the risk like any trader would do. The trade will be closed once the pair price drops below the set SL, and the realised loss will be reflected on your trading account balance. The exit price may differ from the set SL depending on the liquidity and volatility at the time, but the automated exit will save you from losing much.
In the same scenario, you can place a trailing SL, not to stop the loss but to realise profits even if the market goes against you. Trailing SL gives an assurance for the risk that you are willing to take, as the risk level will only reduce with this type of order. Trailing SL can work in any scenario, whether you go long or short. In short, when you place a trailing SL, you are making an arrangement to lock the profits if the price moves in your favour. The trend may reverse later, hitting your SL, but the pips you gained will still be credited to your trading account. You can then calculate the pips in your own currency with the help of a pip calculator.
Trailing SL is often confused with the traditional SL, but the former one is more flexible, while the typical SL does not move at all. The trailing SL can move and follow the direction in which the price of your currency pair moves. Because of this flexibility, the majority of traders have a preference for trailing SL over the regular SL.
How to Use Different Types of Trailing SL in Forex Day Trading?
With trailing SL, you get quite a few options for the type of trailing SL you want to utilise for your trades. Let’s look at the different types of trailing SL to find the best ways to use it in forex day trading.
- Price-based Trailing SL – This type of SL is quite simple and straightforward as you simply decide to place the trailing SL at a specific price, and the actual exit point for the trade will be based on how the broker moves the SL. The best way to find the ideal price level for a trailing SL is by comparing the possible outcomes of different trade scenarios. You can make use of tools like trading calculators for automating the trade-related calculations of potential profits/losses.
Price-based trailing SL will change based on the most recent high price in case of a long trade position. But when you use it for short trades, the SL will follow the most recent low price the pair reaches. Here, you can also place a take-profit order along with the trailing SL, which would be the best course of action if you ask me.
- Indicator-based Trailing SL- The use of various indicators is very common among forex day traders as they give more clarity about the market situation, allowing you to spot the best trade setups with ease. Now, there are some technical indicators that are specifically designed to assist you with setting trailing SL, for which you have to move the SL manually to take the information shown by the indicator and act based on it.
The Average True Range or ATR concept is the basis for most indicators that are being used for setting trailing SL in forex day trading. This indicator can measure the extent to which the currency pair price can move in a specified time frame, and in this context, the time frame would be the day or less based on the strategy followed by the day trader.
Since the currency price movements are measured with pips as the standard unit, the indicator-based trailing stop will also consider the pips for estimating the risk and moving the SL based on the data displayed by the indicator. One thing to keep in mind while using this type of SL is that no indicator can be 100% accurate all the time, and you must test the efficiency of these indicators on a demo account before using them on a real account.
Now, for choosing the right indicator, you can try some popular ones and see which works best. Many traders rely on Chandelier Exits and ATR Trailing Stop for using this type of SL. You can also use non-ATR indicators like parabolic SAR Stop loss indicators. The basic Moving Average indicators can also be considered as trailing stop indicators if you know how to use them.
- Doing It Manually With a Typical Sl Order
Now, another option you have here is manually moving the SL instead of placing a trailing SL. This method is harder to follow and requires some experience as well. The trader will have to constantly monitor the trade to decide how much the SL must be moved while trading. This will be an old-school method mostly followed by traditional and experienced traders.
In the case of long trade positions, the traders wait for a pullback in prices and then move the SL higher as the risk increases after a pullback. But in case of shorting, the trader will move the SL down after a pullback as the risk is reduced in this case. The trader may choose not to move the SL at all if there is no pullback.
So, placing a regular SL order and modifying it as per the market situation gives more control to the trader as the SL won’t be moving on its own like how it is with trailing SL orders. You might have followed this technique if you have ever moved your SL during a trade.
Benefits of Placing Trailing SL
- Perfect for Trend Trading – Trailing SL orders are perfect for day traders who follow the trend trading strategy. By placing a trailing SL, they can follow the trend with minimal risk.
- Protection Against Reversal – Imagine your trade was initially winning and making gains, but then a sudden reversal comes, and you lose it. Such a situation can be avoided with a trailing SL, as it allows you to lock your profits even if there is a reversal.
Problems When You Place Trailing SL
- It does not work well when the market has no clear trend.
- You may end up exiting trades which had the potential for winning.
The Bottom Line
To sum it up, trailing SL is a flexible tool for risk management, but you need to be mindful of the problems that come with it and use it in the best possible way to fit with your day trading strategy in the volatile forex market. Some traders don’t need to set such a type of SL as the standard stop loss works best for their trading system or technique. So, you must see what works for you and choose the best course of action.
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