Trailing stops are a more ad vanced type of stop loss order that can reduce the risk on your trade as the trade progresses. It does this by adjusting itself to a more favorable rate as a trade moves in a traders favor. While this type of order is not necessary knowledge to becoming a successful trader, trailing stops have applications in various trading techniques and its a good concept to learn.

There are two main types of trailing stops that you will encounter, Dynamic and Fixed-Step. You can choose either type when placing a market order or an entry order after clicking the Advanced button, seen below. To test out these different type of orders yourself, register for a FREE Forex trading demo account.

Learn Forex: Two Types of Trailing Stops

Dynamic Trailing Stop

The dynamic option is the most common trailing stop. This will adjust our stop every 0.1 pip that the trade moves in our favor. For example, lets say we set our dynamic stop initially at -10 pips and then the trade moves in our favor 1 pip. Our stop would move 1 pip from -10 pips to -9 pips. The further the trade moves in your favor, the further our stop will move, pip for pip (actually, to be more exact, it will move in 0.1 pip increments).

You can see that this would reduce our risk on the trade the further the trade moved in our favor, because that would result in a smaller stop loss. But lets say the trade does not go in our favor, what happens then?

Absolutely nothing. A trailing stop will only move in one direction and that is in our favor. So if a trade goes against us, our stop will not move further away. Our stop also wont give up any ground it might have gained from a prior positive price move either. It will stay at its high water mark until it is hit or until the trade is closed out, canceling the stop order.

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Fixed-Step Trailing Stop

The fixed option is very similar to dynamic, except it will only trail in fixed increments of pips. When selected, there is a 2 nd field we can change. This is our fixed amount of pips we want our stop to move. So rather than having a stop trail every 0.1 pips like the dynamic trialing stop, we can have it trail every 10 pips, 20 pips, 50 pips, whatever we would like.

This results in a slower trailing stop that waits for a certain number of pips to be accrued before moving that amount of pips. For example, lets say we had a -50 pip stop loss that we set to trail with a fixed-step of 10. Our stop will stay at -50 until the price moves in our favor a full 10 pips. Once +10 pips of floating profit is reached on the trade, our fixed-step stop would jump from -50 to -40. Our stop would then stay at -40 until the price moved in our favor another 10 pips up to +20 pips total. In which time our stop would move from -40 to -30, and so on.

Stop losses are an important part of money management. If you would like to learn how to better use stops, limits and other managing orders, click here for our FREE Money Management Course (27 minutes).

Good trading!

—Written by Rob Pasche

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