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Trailing Stop-Loss

The trailing stop-loss is a dynamic procedure when the exit point moves closer to the entry point if the currency moves in the direction favorable to the trader. The trader may also do this as new support and resistance levels are formed as the currency moves in their direction.

The trailing stop decreases the risk if the currency initially moves in the trader's direction but then fails to follow through. The trailing stop also attempts to fix a minimum amount of profit if the rate moves substantially enough for the trader to move the trailing stop to a profitable level.

Note that the trailing stops should only reduce risk. It is not advised to move them away from the entry point.

Figure 1 below shows how to execute a trailing stop using support and resistance levels. This is the trade from Figure 1 where the trader is short the EUR/USD near 1.4510 with a stop at 1.4590. The trade moves favorably, but then a rally occurs.

When the rate moves back below the former low, the downtrend is intact and the stop is dropped to just above the new resistance level, at 1.4450. The stop has "trailed" the price action. In this case it has guaranteed a 60 pip profit as the trailing stop is now below the entry price.