What is a 'trailing stop' and what does the 'trailing stop distance' mean?
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  1. #1
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Default What is a 'trailing stop' and what does the 'trailing stop distance' mean?

    Hi,

    As you can see - I am new at this - but need to learn quickly.

    My problem is this:

    I have opened a Live Mini Forex account with a certain company.

    When you place an order to buy an instrument you can place a 'Market Order' for that instrument at a certain price BUT these 'Market Orders' very rarely get executed i.e. you can wait for hours for the order to be accepted at that price.

    On the other hand you can place a 'Stop Order' or a 'Limit Order' and both of these options allow you to set a 'Trailing Stop Distance'. Using either the 'Stop Order' or 'Limit Order' with a 'Trailing Stop Distance' these orders to buy are always executed very quickly but never at the price that the instrument was at when you placed the order.

    The same applies when selling and instrument (assuming that things have moved in the right direction and you now want to sell at a profit). If you put in a 'Limit Order' this order is almost always never executed by the dealer at the specific price but is you put in a 'Stop Order' with a 'Trailing Stop Distance' the order is always executed very quickly but again never at the closing price that was displayed.

    I am assuming that the terms that are in quote marks above are common forex terms and not specific to the software (at least I hope so otherwise nobody will know what I'm talking about).

    Let me ask this question:

    Is there anyway to do this:

    I want to buy ZAR and sell USD at 7.5000. When the rate changes to 7.4500 I want to sell ZAR and buy USD making a small profit. Is there any way to say 'if the rate stays anywhere equal to or above 7.4501 then do nothing but if and when the rate goes equal to or below 7.4500 then execute the order'. On this pair the PIP is 13 and I still don't understand what this is.

    The problem in the above scenario is that on my system I could put in a 'Limit Order' specifying that I want to sell my ZAR and buy USD when the rate gets to 7.4500 but this order never (well very rarely) gets accepted and executed. However if I use the 'Stop Order' and specify a 'Trailing Distance' the order get executed immediately but invariably at a much higher rate / less profit and in most cases I have actually lost a little bit on every trade. Does this have anything to do with the 'Trailing Distance' option i.e. I have always accepted and use the default of 1 but from the little bit of help that I managed to get online from the company I seem to think that maybe this 'Trailing Distance' should be much larger or something like so that my order will be executed within the range that I specify.

    Am I all confused about this stuff?

    I really don't know how all this fits together!

    Any help would be appreciated.

    Regards,

    Dale.

  2. #2
    shadow's Avatar
    shadow is offline Senior Member
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    ok, when you first put on a trade you initially are in (-) pips. So you said ZAR/USD or whatever it is (sorry I don't trade it), has a buy for say 7.500 and the sell is 7.513. Yeah, that's why most people trade the EUR/USD, it has a low "spread" which is 3 pips as to the ZAR/USD which I assume has 13 pips. I know eh, kind of sucks that you start out down by 13 pips. Anyways that is probably why the limit isn't executed, since it has to go an extra 13 pips. You probably won't like this, but I recommend demo trading, at least for a few month's, at least to get the feel for it. The thing is that to become successful at trading, it takes time, and once you put on your first trade, if you haven't already, you'll know just how hard it is trading live. Some people have went through many years without success. So, when you say, you need to learn quickly, it's not so simple. However, experience and overcoming obstacles while learning from mistakes is what will make a master trader. Sorry, off on tangent. anyways, it's kinda hard toi answer all those questions, but there is a school here. If you read through it, you can learn the concepts. It probably does a better job then I do. just go to the top of the page where it says school, and read through as many lessons as you can. Besides, the market is closed on the weekend, so it's great to study on these days. Hope this helps a bit.

  3. #3
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Thanks for the reply but now I am even more confused (sorry) (and I did go through the pages here at babypips.com before registering on the forum here in an attempt to answer my questions).

    I just logged in to my trading system to check the figures and this is what they say:

    USD/ZAR Sell = 7.824 Buy = 7.924 and the Pip Value is 0.13

    This is how the currency trades all day every day i.e. there is always a 0.100 difference between the sell and buy rates and the Pip Value is always 0.13.

    I then tried to Sell USD and buy ZAR at the 7.924 (one lot of $50.00) and your are then immediately down by $13.36.

    The main reason that I trade this pair is because of its volatility i.e. the figures above could change in one movement to Sell = 7.124 and Buy = 7.224 in an instant in which case you (could) make a killing very quickly if the orders were being executed but thats the problem - in the above example I would immediately initiate an order to sell ZAR and buy USD at 7.224 but this order is never executed (if it is a 'Limit Order') and if I initiate a 'Stop Order' with a 'Trailing Stop Distance' set the order gets executed pretty quickly but never at the 7.224 rate - normally it would be something like 7.920 in which case I have now lost money even although at the time of placing the order the the price was 7.224 and this is what I don't understand.

    More importantly I did try a few demo systems and settled on a particlar one with a particular firm.

    Using the demo system I made a small fortune trading like I did in the example above in a matter of hours i.e. I made in excess of $3000.00 in about four hours over two days. So I thought - this is great and opened a live account and transferred $5000.00. Within one hour of using the live system I had lost about $3000.00 and nothing else had changed - not the way this pair fluctuates or my method of trading!!! The reason I found out from the company is that the demo system (although it is using live data) is not an administered system i.e. there is no dealer to either accept or decline your orders at a specified price. On the demo system therefore - if your are quick - you can make it big - simply because when you click OK to buy or sell at a certain rate that is the rate that you are given and the order is ALWAYS executed and ALWAYS executed at the displayed rate. On the live system their is human intervention involved i.e. the dealer has to accept or decline your order at its rate and if the figures have moved considerably then the order is never executed.

    Let me put it this way - is this how it is supposed to work i.e. on a live trading system let's say that you want to sell let's say USD and buy ZAR at the current rate and let's say that that rate is 7.500 so you initiate an order at 7.500 but you get offered a rate of 7.300 by the dealer. Is this how it is supposed to work? Are there systems out there or companies out there that will execute your orders at the rate you specified regardless of what may have happened to the rate between the time of placing your order and the dealer getting around to executing your order or is this the reason that trading this way is risky?

    I worried that maybe the place where I have my account is not the best place to be (unless this is how it is supposed to work). I mean I find it extremly hard to believe that if there is no difference between the demo and live system and everything else is the same and I can make fortunes on the demo system but lose a lot on the live system with supposedly identical data and operation.

    Any input on this would be greatly appreciated - I really need for this to work for me.

    Regards,

    Dale.

  4. #4
    pipjunky's Avatar
    pipjunky is offline Newbie
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    Hello.

    One of the first things i would recommend is that your download several demo account from all the different firms like the one's that sponsor babypips.com and find out which trading system suites you best and offer you the best service and assistance. Then check that they are registered with the NFA (National Futures Association) which control and regulate the Forex Firms in the USA.

    Following the basic principals from the school at babypips.com you should not be trading a pair just because it is very volatile, zar = South African Rand is a high yielding exotic currency and almost all exotic currency take a high spread because of the dangers of the currency perhaps not being as liquid as
    us$ yen etc.

    The spread which you stated as being "13 pips" should basically be the number of pips you will "pay" to your respective trading firm and it sounds like the spread for that pair (with your firm) is 100 pips. When i first reseached forex trading i read about alot of firms that 'charged' sinificant spreads especially on exotic pairs.

    I would recommend following some trades in babypips blog section they give breakdowns of every trade they conduct and test them in your demo. As a beginner you should be trading the common currency pairs and not trading large volume never risk more than 1-2% of your account!! start small build up your personal confidence and confidence in your trading system.I tested my demo for 2/3 months, now I still only stick to the more common pairs with my real account and am still learning i think even more now. EurUsd, usdyen, gbpusd etc. All the respective currency pairs will trend much nicer than exotic pairs and hence more predictable.

    Be patient if your chuck money into something you do not understand you are gambling and not trading (I dont mean to offend you).

    I will find a nice example of a normal trade a show ya what it should look like and you can decide from there.
    Do you live in South Africa by any chance ?

  5. #5
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Thanks for the reply (replies).

    First of all - no offence taken whatsoever - very keen to master this stuff though.

    Second - yes - how did you guess - I do live in South Africa.

    I think I may have figured out this trailing stop thing though.

    Please have a look and tell me what you think.

    Basically (if I understand this correctly):

    If I sold USD and bought ZAR at 7.5000;
    At this point I would start with a net loss of -100 PIPS;
    I would wait until the rate changed to let's say 7.3000;
    This would mean that I am in a positive position of 100 PIPS at this point;
    I quickly initiate a 'Stop Order' with a trailing distance of let's say 50 PIPS;
    If the rate changed even further in my favour i.e. to 7.100 the closing price would also move with the rate BUT if it turned against me it would never go lower than 7.350 and the order would be executed (stopped) at 7.350.

    Does this make sense to you? Am I on the right track?

    This is driving me nuts.

    And the only reason that I have to worry about this is because of the fact that when I choose to buy an instrument at a certain price or sell it again at another price I never (very rarely) ever buy or sell that instrument at the price at which it was at the time of my placing my order. Is this normal? That's the problem.

    If a 'Limit Order' was ALWAYS executed at the specified rate I would not have a problem but a 'Limit Order' seems to stay up on the system until the rate has dropped far below the closing price of my 'Limit Order' and then and only then is this order executed. On the other hand for some or the other reason a 'Stop Order' always almost seems to get executed immediately so that is why I am trying so hard to understand this.

    Regards,

    Dale.

  6. #6
    pipjunky's Avatar
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    I live in South Africa as well

    If I understand correctly, then your spread is 100 pips and the pip value is 0.13 that means you get/pay 0.13 for every pip the pair move up/down. In your example you are actually quoting changes of 1000 pips not 100 but i know what u mean so just flow with it.

    "If the rate changed even further in my favour i.e. to 7.100 the closing price would also move with the rate BUT if it turned against me it would never go lower than 7.350 and the order would be executed (stopped) at 7.350."
    ----> I would say you initiated a normal stop order and not a trailing stop generally (I stand to be correct) your trailing stop distance cannot be smaller than spread of the chosen pair. So I think it added the 50 pip to the minimum of 100 pip minimum making your trailing stop 150 pip and because the spot price did not move further down the trailing stop wont move down either and hence when it moves against it must stay at the level. You should have set a limit for your exit point as it is dangerous just to let it run..

    Anways i hope i am able to word my response nice ... just to clarify Trailing Stop Loss will follow the spot price up by the amount you specify here is an example:

    eurusd we go for a long position,here are the spot prices the Sell - 1.3310 the Buy - 1.3313, we going long so we hit the 'Buy' button (buying eur selling usdollars) the spot on the chart say the price is 1.3310 now remember the firm take it 3 pip spread therefore making your buy price as quoted 1.3313 and the 'pip value' for this pair is 1.00 basically win/lose $1 for every pip move per 1 lot with a mini acc. (just for the sake of this example) we think the price will move up past 1.3343 so we set a limit at 1.3343 to make 30 pips. Now to be safe we put in a Trailing Stop with a trailing distance of 15 pips therefore making the stop order at our open 1.3298. (the trailing stop should be large enough to withstand the fluctuation in the respective pair).

    From our open position things look good price moves up during the day to 1.3340 our trailing stop will have moved up to 1.3325 the spot suddenly drops to 1.3330 our trailing stop stays at 1.3325 (5 pips away from stopping out). This is because the Trailing stop only trails the spot price up and will never move down when the spot does it is there to prevent you from losing to much money should the markets turn against you and this should be a calculated loss that u would have made. just as you should have calculated gains.

    So the spot moves back up to 1.3340 and smashes through the 1.3343 mark the will automatically limit out at the spot of 1.3343 at this point the trailing stop would have been 15 pips behind at 1.3328 meaning that if we did not meet our limit and dropped at 1.3342 and it went down it would have 'stopped' out at the trailing stop of 1.3327 (15 pips behind 1.3342).

    hope this helps.
    I am making sense so far ?

  7. #7
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Sorry - this is just a test - I am having a problem posting messages - and I just sent you a long reply that has since dissapeared.

  8. #8
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Nice to hear that you are also over here. I'm on the West Rand, how about you?

    I have read your reply and I think I understand (well sort of).

    I need to take your example, work it out on paper and compare it to the operation of my trading system, and go from there.

    The problem with my plan is (once again) that the orders that I place are not executed IMMEDIATELY and at EXACTLY the price that I place the order at (no matter whether it is buy or sell). Is this normal?

    Actually - what I would like to know - is the mechanics of what happens when trading forex. For example - when I click on the OK button to buy or sell an instrument - what happens then? Where does this request go? You know - stuff like that.

    I mean this would go a long way to explaining why buying or selling an instrument at a certain price does not happen immediately and at that price. Is there someone somewhere in the blue yonder that goes through each order thet receive and either accepts or rejects the order or is it an automated process or what?

    What seems to be happening to me is that by the time I get the prices displayed and decide to buy or sell an instrument at a certain price by the time I place the order the rate has changed on the other side and this is why the orders are not getting executed. And I am not working on a dialup modem or anything like that - I have extremely fast workstations (originally put together for video editing) and connect to the Internet with a 4MB ADSL line so it is not like I am working with delayed data or something like that.

    Comments?

    Thanks,

    Dale.

  9. #9
    pipjunky's Avatar
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    me = northcliff overlooking the westrand

    I do not think that is normal. If your price is breached the trade should go through instantaneously!
    Maybe this helps ie. 7.1000 is your limit in a short trade your spread is 100 pips the price you would have to reach for your limit to sell is 7.0900. this is because in a long position as you hit the buy button your spread is fixed into the spot when you short is adds the spread to the current spot price and u can see this on your trading platform the spot will be quoted on the charts as 'y' and in your position window on your platform your 'close' price will be 'y+100'. perhaps that is the reason it may appear not to reach your target. I cant see the reason for a limit not going through.

    Were you called by an introducing broker from you fx firm? If so i think with regards to the back room operation of fx he might better explain.
    In brief: Basically all the data that u see on your screen is supplied to your FX firm from the bank where they have large trading rooms that collect or distribute the FX reserves which is required for local firms to pay for the import in what ever currency and many many more things cash for travelers etc. Google it i am sure somewhere it is described.

    I need to shoot out be back in 2 hours or so

  10. #10
    dpaterso's Avatar
    dpaterso is offline FX-Men Honorary Member
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    Hey - thanks for the info.

    I'm just past Westgate - how about that!

    Anyway:

    I found the firm on the Internet - they did not contact me - and it is not a local firm. I did as much research as I felt was necessary to verify their business and am satisfied. They are also one of only a few firms that offer the USD/ZAR pair. I also prefer their software to any of about another five demo's that I tried.

    So what your are saying is that the price on my 'Entry Limit Order' has to be breached NOT JUST REACHED for my order to be executed? Is that it?

    What I have noticed is that my 'Entry Limit Orders' are only executed sucessfully when the price goes past and stays past the amount on my order for a while i.e. if it jumps back again i.e. out of my favour and away from the amount on my order then the order is not executed and stays open.

    By the way - in your professional opinion - where is the USD / ZAR pair and Gold and Crude Oil going on Monday? I promise I won't hold you to it (I can tell you where they had better go for my sake as I have open positions right now and can't do anything until Monday )!!!

    That's also a good point - when do you trade - I mean at what time do you start on Monday for example? I have read the section on when to trade on this website but of course there is no mention of our JSE.

    What market opens first on Monday?

    Regards,

    Dale.

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