Trends start suddenly and then reverse direction suddenly. A trailing stop loss is used to lock in the profits once a trend starts. Entry and exit are the 2 most important parts of a trade. Even with the right entry you can lose when you don’t close the trade at the right time. Price can reverse at any time. A trailing stop loss trails price action as the trend continues. When price reverses, a trailing stop loss closes the trade when the conditions set by the trader are met.Watch the video below that explains how to use the trailing stop loss!
This is another good video on how to use a trailing stop loss.
MT4 does provide a trailing stop but it is very rudimentary. Keep your trading simple. One easy method is to put a reasonable take profit when you open the trade. This is what we do most of the time. We decide how many pips the market is going to move when we enter into a trade. Then we put that as our take profit target. After a few hours we check again. If the profit target has been hit, good. It it is not hit we check the charts if we think market is reversing we close the trade. For example, if you are trading EURUSD, it is reasonable to put a profit target of 50 pips while trading GBPUSD, a profit target of 100 pips is reasonable as it will get hit most of the time. But markets are what they are always unpredictable. Another strategy is to use a trailing stop loss. There are many ways to implement this trailing stop loss.
In the last post we discussed in detail how to code an EA that trails the MACD Signal Line. You can read the past post and download the MQL4 code for the EA. When the signal line crosses the MACD histogram, it closes the trade. We gave you an example of how this EA could have maximized the profit once the trend starts. MACD has of course one problem. It whipsaws a lot. Only set the this MACD Signal Line Trailing EA when you think the trend is strong. So once you have entered into a trade and you think that the trend is strong you can set the EA on M15 or M30 and let it monitor price action and when the signal line crosses the histogram close the trade. You can code all sorts of Trailing Stop EAs. For example, you can code an ATR Trailing Stop EA. You can also code a simple MA Trailing Stop Loss EA. All these EAs will start trailing price action according to the code that has been implemented.
Price action is not a linear function. If price was a linear function, it would have followed straight lines and it would have been very easy to know where price will be goind 2 bars later, ten bars later and even 20 bars later. Unfortunately price action is a non linear function. This makes modelling price action a highly challenging task. In this article the author argues that implementing a function based trailing stop loss can help in maximizing the profit.
So there are many ways to implement the trailing stop loss. We recommend you keep your trading simple. Just decide the profit target that you think is reasonable. Then check a few hours later. If the profit target has been hit or not.