What is a Forex Trailing Stop?

What is a forex trailing stop?  A trailing stop order is used in addition to a regular stop-loss.  Every time you place a trade, you always add a stop-loss.  This means when the price reaches your desired level, your trading software will automatically close out the trade.  A trailing stop edits the stop-loss to move forward by a certain amount in the same trade.  Confused?

If you see a strong trend upwards on a forex graph and you buy into that pair, you should add a stop-loss to ensure you don’t lose money if the pair suddenly falls.  However, you also don’t want to put a ceiling on your profits, so you can add a trailing stop order.  At first glance, it seems like if you use a trailing stop you are ensured a profit, but that isn’t always the case.  Here’s an example:

Assume you are buying dollars for Japanese Yen (USD/JPY) at 45.00 with a stop at 50.00. If you add in a 20 pip trailing stop to that, each time the pair moves 20 pips from where you entered the trade, then the stop-loss also advances by 20 pips.  As a result if the pair moves from 45.00 to 45.20, then our stop-loss moves from 50.00 to 50.20. The stop shifted, but notice that it didn’t ensure you a profit on the trade.

When is the best time to use trail stops?  The optimum time to use a trail stop is when you see a strong upward trend.  In other words, the angle of the graph is very steep.  If a pair is in a mild trend or not moving much at all, trail stops won’t do you much good.  Trail stops are for making a profit in a very short amount of time.  This means a “fast-moving” pair is perfect for using trail stops.

Pounds and Yen (GBP/JPY) is often a rapid mover. It can change by hundreds of pips each day over the course of a few hours.  Conversely, the Swiss Franc and Japanese Yen don’t change very quickly, so it’s not a good choice for trail stops.  Practicing trail stops on a demo will give you a chance to understand trail stops in a more hands on way and keep you from losing money.

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Forex Currency Pairs

Foreign Exchange trading, or forex, is made up of simultaneously buying one currency and selling another.  The two currencies being traded are called a currency pair.  When a currency pair is listed in shorthand with a line between them it is called the currency quote.  For example, USD/EUR is dollar and Euros.  Since there are so many various currencies available in the world, they are divided into major and minor currencies.

Major currencies include the seven most frequently traded.  These are the US dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian dollar, and Australian dollar.  Any other currency is considered minor and is generally harder to profit from due to greater differences in the exchange rates.  Any currency pair that does not include the US dollar is called a cross currency.
Historically, money was always converted to dollars before being converted again into the desired currency.  Cross-trading was a way to eliminate the extra practice of conversion.

The most commonly traded forex pairs are considered to be the EUR/USD (the Euro vs. the US dollar), GBP/USD (the British pound vs. the dollar), USD/JPY (you should know the first one by now vs. Japanese Yen), and USD/CHF (Swiss Franc).  The first currency quoted is known as the base currency.  The base currency is always equal to one unit of exchange: one dollar, one Euro, etc.  The second, the quote currency, is the price needed to get the base currency.

Typically, it will look something like this: USD/EUR = 1.2345.  This means that $1 = 1.2345 Euros.  If you are buying this trade, you are speculating that the base currency, in this case dollars, is going to increase in value.  If you are selling this pair, you are assuming Euros are going to be more valuable.  Not so difficult, huh?

Understanding forex pairs is the basis for trading currencies.  For a beginner, choosing just one or two of the commonly traded pairs will both ensure simplicity and give you a greater understanding and confidence of how the market works.  Forex trading is a twenty-four hour, exhilaratingly fast paced market.  In order to make it a profitable venture, make sure you understand how the system works.

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