Example: Trailing Stop

Here is an simple scenario explaining how to 'lock in' profits in volatile markets using a Trailing Stop.

Example: 'Buying' EUR/USD with a Trailing Stop

Say you 'buy' our EUR/USD at £20 per point for 1.3581/1.3583, choosing a Trailing Stop distance of 30 points and a Step size of 10 points. The Stop initially sits 30 points behind your opening price, at 1.3553.

Immediately the Euro starts to strengthen against the Dollar. Very soon our price has risen to 1.3593 (10 points above your opening price) and your Stop 'steps' up by 10 points to 1.3563 to re-establish a 30-point distance from the new market level.

The rally continues and by lunchtime EUR/USD is trading at 1.3646/1.3648. Your Stop has therefore moved automatically five more times and you are now sitting on a healthy potential profit with your Stop waiting 33 points behind at 1.3613.

A surprise announcement that Eurozone industrial output growth has fallen suddenly sends the Euro plummeting and within minutes the EUR/USD is trading back down at 1.5591/1.5593.

Your Trailing Stop has kicked in and your position is closed 33 points below the recent high at 1.3613, still well above your opening price of 1.3583.

Your profit on the trade is calculated as follows:

Profit on trade: 30 x £20 per point = £600

With a conventional Stop Order, unless you had moved it manually, you would still be in the market, looking at a relatively small paper profit. By contrast with a Trailing Stop you are able, in this scenario, to profit from a volatile market.

Remember, Trailing Stops are subject to slippage and therefore could result in losses that exceed your initial deposit should the market move sharply against you.