Technical Trading Tips and Techniques by 
The trailing stop, especially in Forex trading, is pure genius. And I’m not just talking about automated trailing stops, but manual ones as well. The trailing stop epitomizes the concept of letting your profits run and cutting your losses short. Theoretically, a well-placed trailing stop can allow a position to extend ad infinitum as long as price continues to trend in one direction, while simultaneously locking in hard-won profits.
Setting profit limits, on the other hand, is a good and common practice, especially if there is some logical technical basis for choosing that price level. But let’s face it, trying to pinpoint a precise profit target is a hit-or-miss affair, especially in the roller coaster ride that is currency trading. One of the worst things to happen to traders is having price just miss a profit limit by a hair, and then reversing on a dime to turn a substantial profit into a loss. Trailing stops are geared towards preventing this type of disaster.
If executed properly, trailing stops can generally do wonders for Forex traders, especially for medium- and long-term trades. The most common practice for manually trailing stops is to place the trailing stop right below the last swing low, or pullback, in an uptrend. The opposite is true in a downtrend. Automated trailing stops, on the other hand, follow price by a set number of pips. Whichever method is used, whether manual or automated, trailing stops can potentially be the difference between an average trader and a consistently profitable one.
- James
James Chen is the Chief Technical Analyst at FX Solutions, a leading Forex broker. He is also a registered Commodity Trading Advisor (CTA) and a Chartered Market Technician (CMT) Level 3 candidate. At FX Solutions, Mr. Chen writes daily currency analysis, conducts forex trading seminars, and has authored numerous articles on currency trading and technical analysis for major financial publications. His upcoming book, Essentials of Foreign Exchange Trading