A Trailing Stop Loss is a dynamic risk management tool used by traders to protect profits while allowing for potential gains as the market moves in their favor. Unlike a regular stop loss, which is fixed at a specific price, a trailing stop loss moves with the market price to "trail" the asset’s price in the direction of the trade.
When the market moves in the trader's favor (for example, the price rises in a buy position), the trailing stop loss automatically adjusts upward, maintaining a set distance or percentage from the current market price.
If the market reverses direction, the trailing stop loss remains fixed at its last position, preventing further losses if the price moves unfavorably.
Once the price hits the trailing stop loss level, the position is closed, securing the profits made up until that point.
A trader buys a stock at $100 with a 10% trailing stop loss.
If the price rises to $120, the trailing stop will move up to $108 (10% below the new price).
If the price then falls to $108, the position is automatically closed, locking in a $8 profit per share.
The trailing stop loss is especially useful in volatile markets, where prices can fluctuate quickly, as it helps traders lock in profits while minimizing potential losses. It is commonly used in forex, stocks, and CFD trading.
Open the MT5 platform and go to the Trade tab.
Right-click on the open position or order that you want to set a trailing stop loss.
Select "Trailing Stop" from the menu.
In the "Trailing Stop" window, select the number of points or pips that you want the trailing stop to move with the market. You can also choose to set a custom value.
Click "OK" to set the trailing stop loss.
The trailing stop loss will now be activated and will move with the market price. If the market price moves against your position, the trailing stop loss will not be triggered until the market price reaches the trailing stop level.
Trailing stop losses can only be set for open positions or pending orders.
You can only set one trailing stop loss per position or pending order.
Trailing stop losses are not available on mobile trading terminals.
Trailing stop losses can be used with both market orders and limit orders.