Here is an simple scenario explaining how to 'lock in' profits in volatile markets using a Trailing Stop*.
Example: Buying EUR/USD with a Trailing Stop
Say you buy our EUR/USD at 1.5581/1.5583, choosing a Trailing Stop distance of 30 points and a Step size of 10 points.
The Stop initially sits 30 points behind your opening price, at 1.5553. Immediately the euro starts to rise against the dollar. Very soon our price has risen to 1.5593 (10 points above your opening price) and your Stop 'steps' up by 10 points to 1.5563 to re-establish a 30-point distance from the new market level.
The rally continues and by lunchtime EUR/USD is trading at 1.5646/1.5648. Your Stop has therefore moved automatically eight more times and you are now sitting on a healthy potential profit – with your Stop waiting 35 points behind at 1.5613.
A surprise announcement that eurozone industrial output growth has fallen suddenly sends the euro plummeting and within minutes the EUR/USD is trading back down at 1.5591/1.5593. Your Trailing Stop has kicked in and your position is closed 35 points below the recent high at 1.5613, still well above your opening price of 1.5583.
With a conventional Stop Order you would still be in the market, looking at a relatively small paper profit. By contrast with a Trailing Stop you are able, in this scenario, to profit from a volatile market – and take a lunch break too…
*A stop order may not limit your risk in times of rapid market movement. In such cases the market may move through your stop in which case your order will be filled at the best available price.