What Is a Trailing Stop? A Detailed Guide to 6 Practical Trading Strategies

Common Trader Problems

During market activity, traders often face two stressful situations: when is the right time to take profit and when to cut losses. You may have earned some profits but start to fear the price will reverse. Conversely, when trading is at a loss, you hesitate whether to close the position or continue waiting for a recovery. Emotions in these moments can easily influence decisions, weakening the trader’s discipline.

Fortunately, modern trading platforms like Mitrade have developed useful tools to minimize emotional impact. One of these tools is Trailing Stop orders – an intelligent solution that automates profit and loss management.

What Is a Trailing Stop and Why Is It Important?

Trailing Stop is a special type of stop order that allows you to set flexible take profit or stop loss levels, automatically tracking and adjusting according to market price. Instead of using a fixed price like traditional Stop Loss orders, a Trailing Stop “follows” the market price, only activating when the price reverses beyond the preset distance (measured in pips or percentage).

The key difference is: if the price continues to rise (with a Long position) or fall (with a Short position) in your favor, the Trailing Stop level will automatically increase or decrease accordingly. This allows you to protect accumulated profits while still leaving room for higher gains.

For example: If you set a 10% Trailing Stop for a Long position, the order will only activate if the price drops 10% from its highest point after you entered. As long as the price keeps making new highs, your stop level will keep moving up.

How Trailing Stop Works in Real Scenarios

Scenario 1: 10 Pips Trailing Stop on USDJPY Pair

Suppose you see a bullish outlook on USDJPY at 107.852 and decide to go Long. You set a 10 pips Trailing Stop, meaning if the price drops to 107.842, the order will be triggered.

The next day, the price rises 50 pips to 107.902. Your Trailing Stop automatically moves up to 107.892 to lock in the new profit.

On the third day, the price drops back to 107.900. The Trailing Stop remains at 107.892 since no new high was made.

Finally, when the price hits a new high at 107.922, the Trailing Stop moves up to 107.912. When the market declines to 107.912, the order executes, and you secure a 60 pips profit – a good result compared to your initial expectation.

Scenario 2: 10% Trailing Stop on a SHORT Position

A trader predicts USDJPY will decline, so enters a SHORT at 126.332 with a 10% Trailing Stop. However, the market reverses and the price rises to 139.219 – exceeding 10% from the entry point. The Trailing Stop order is triggered at the 10% stop-loss level.

In this case, the Trailing Stop functions exactly like a regular Stop Loss order – both cut losses at 10%.

Effective Trailing Stop Levels: Not Too Tight, Not Too Wide

The biggest challenge when using a Trailing Stop is finding the right level. Setting it too tight may cause the order to be triggered by normal market fluctuations, leading to premature exits and missed profits. Setting it too wide exposes you to larger losses or the risk of giving back most of your gains.

There is no “golden rule” applicable to all markets. Each currency pair, index, or crypto asset has different volatility. You need to analyze price patterns and consider market psychology to develop your own strategy.

Quick guide:

• Highly volatile markets → Wider Trailing Stops
• Low volatility markets → Closer to market price

6 Effective Strategies for Using Trailing Stops

Strategy 1: Based on Personal Risk Level (R-Multiple)

The simplest way is to determine your acceptable loss (called R), then set the Trailing Stop at 1R, 2R, or nR depending on market conditions.

Example: If you accept a maximum loss of $50 per trade (= 1R), you can set the Trailing Stop at 2R (100 USD) if the market is volatile, or 1R if the market is calm.

Strategy 2: Using Parabolic SAR

Parabolic SAR is a technical indicator that helps identify when momentum is about to fade. When the candlestick approaches the SAR dots, it signals a potential reversal. You can set the Trailing Stop at the nearest SAR level to ensure profit-taking before the market turns.

Strategy 3: Based on Previous Candle High/Low

Instead of just pips or percentage, use previous candles as reference. For example, if in a SHORT position, set the Trailing Stop at the highest high of the last 3 candles. If in a LONG position, set it at the lowest low of the last 3 candles. The number of candles can be adjusted based on your trading style (short-term or long-term).

Strategy 4: Based on Support-Resistance Levels

This is a simple yet effective method. Identify support and resistance levels on the chart, then place the Trailing Stop at these levels. If unsure, rely on the strongest recent support/resistance levels.

Strategy 5: Combining ATR

This strategy is similar to candle-based methods, but the Trailing Stop is calculated using the recent high/low plus a portion of the Average True Range (ATR) indicator.

Example: If current ATR is 60 pips, add 50% of that, i.e., 30 pips. So, the Trailing Stop = previous candle high + 30 pips.

Strategy 6: Using Moving Averages

A simple and effective method: set the Trailing Stop at the Moving Average line. Common choices are SMA20 or EMA20, but you can adjust the timeframe depending on your (short or long-term) strategy.

Advantages and Limitations of Trailing Stops

Advantages:

Unlimited profit potential: You cannot predict how high the price will go, so a Trailing Stop allows you to keep earning as long as the trend continues. This is better than fixed limit orders (limit order) at a set price, which might cause you to exit too early and miss out on gains.

Time-saving and automation: No need to constantly monitor the price chart to adjust orders. The Trailing Stop level adjusts automatically, letting you focus on other trades or activities.

Limitations:

Order execution risk: If the price moves too fast, especially in less liquid assets, you might not get filled exactly at your Trailing Stop level.

Difficult in highly volatile markets: If the Trailing Stop is too close, you may get stopped out prematurely. If too wide, the risk of larger losses or giving back profits increases.

Loss of proactive analysis: Relying too much on automation can cause you to miss opportunities for optimal buy/sell timing.

How to Set Up a Trailing Stop on Mitrade

When trading on Mitrade, you’ll see the Trailing Stop option directly in the order window. Just check the Trailing Stop box, enter the desired pips, and the order will automatically follow the price.

You have two setup options:

1. At order placement: Set it when you click “Buy” or “Sell” for full automation.
2. After opening the position: Adjust the Trailing Stop level later, depending on your control preference.

Example: Set a 20 pips Trailing Stop. When the profit reaches 20 pips, the stop level is set at the entry price. When profit reaches 40 pips, the stop level moves up by 20 pips. You are always protected with at least 20 pips of profit.

Frequently Asked Questions

When should I use a Trailing Stop?

Use it when you want to protect current profits while allowing gains to grow if the trend remains favorable. Avoid in sideways (range-bound) markets, as it may trigger unnecessary exits.

Is a Trailing Stop safe?

Very safe in trending markets. It helps lock in gains and cut losses promptly when the price reverses. However, in sideways or unpredictable markets, it can pose higher risks.

Conclusion

Trailing Stop is a powerful tool to optimize profits and minimize emotional trading decisions. If you’re busy or cannot monitor prices constantly, it’s an ideal solution – saving time and maximizing gains.

There is no “secret formula” for the perfect Trailing Stop level – it depends on your trading style (short or long-term) and the volatility of each market. Test different strategies on a demo account before applying to real trading, and always remember that risk management is key to trading success.