There is always risk on any trade placed out into the open market. One specific difference between professional and novice traders is in how this risk is managed. In previous articles we discussed using technical indicators such as ATR, PSAR, and Price Channels specifically for this purpose. Today we will examine a new method of limiting risk by employing a fixed trailing stop to capitalize on continued momentum in trending markets.
Fixed trailing stops are specifically designed to advance a stop forward a specified amount of pips after a position has moved in your favor. This can be useful in a trending market, to lock in profits on an extended move. Today we will take a look at a sample trade with multiple lots on the USDCAD to examine how a trailing stop may work in our favor. The chart below depicts an entry to sell the USDCAD at 1.0258. There is a stop of 50 pips being placed at 1.0308 with the fixed trail set to 50. A buy entry at 1.0208 has also been put in place to offset half of our position.
The Chart below depicts what will occur if the USDCAD moves in our favor as planned. First, let’s look at our entry order. If price touches 1.0208 this implies that our first entry order to buy will be executed. The order was designed to buy back half our net position. This means if our two trades total 100k our entry should be set to offset only 50k. Using a FIFO based FXCM account through FXCM US, this entry will close out the first lot executed locking in 50 pips of profit.
The second component of the order is our fixed trailing stop. Assuming that our trade has moved in our favor by the 50 pips specified, this would move our stop on our remaining position to 1.0258. By comparing the picture above with the graph below, we can see this transition as out stop moves on our remaining 50k order to break even. If the trade goes in our favor, this order has the potential to trail even further. Each time our pair moves 50 pips, our fixed trailing stop will move forward continuing to lock in that additional amount. When our position moves against us, the stop is designed to close our trade as originally intended at the newly updated stop price.
This two lot philosophy can be used on virtually any trending graph. The first lot is designed to lock in a predetermined gain while the second lot is left as a trending component. If the market continues to trend and make lower lows as in the example above, this lot will continue to trail and lock in profits. If you are trading through the FXCM UK branch, the same procedure can be used. However, the orders can be specified on a ticket by ticket basis.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
