For beginners I say, don't worry about what type of stop loss you use, trailing or dynamic. For the more advanced trader read below.
Now, this is important to understand. A stop loss is where you want to get out to limit your losses because your strategy is not working in the short term. You do not ever want to hang around in hope of a turnaround in case you are making bigger and bigger losses.
A stop loss is also important because it means we can leave the screen knowing we will be closed out of a trade. And if the trade is at a profit then our stop loss is taking us out at a profit!
Not all brokers offer the same types of stops.
What are the differences between Fixed Trailing Stops and Dynamic Trailing Stops?
A Trailing Stop is a stop loss order that trails (moves) a stop in your favor by a specific distance as long as the market is moving in a favorable direction.
The Two Types of trailing stops are Fixed and Dynamic:
Fixed Trailing Stops trail your stop by a fixed amount of pips as the market moves in your favor. This results in a slower trailing stop that waits for a certain number of pips to be accrued before moving that amount of pips. The minimum Fixed distance is 10 Pips.
- For example, let’s say we had an initial -50 pip stop loss that we set to trail with a fixed-step of 10. Our stop will stay at -50 until the price moves in our favor a full 10 pips. Once +10 pips of floating profit is reached on the trade, our fixed-step stop would jump from -50 to -40. Our stop would then stay at -40 until the price moved in our favor another 10 pips up to +20 pips total.
Dynamic Trailing Stops move your stop every 0.1 pips the market moves in your favor 0.1 pips. The 0.1 Pip move cannot be changed.
- For example, let’s say we set our dynamic stop initially at -10 pips and then the trade moves in our favor 1 pip. Our stop would move 1 pip from -10 pips to -9 pips.
Why is the difference important?
Most of the time it is not. And Pips Predator tells you a suggested stop loss too. So you would just enter that stop loss when placing your trade. BUT you need to know whether it should be fixed or dynamic. As I said, most of the time it will not matter.
However, my preference is for fixed because let's say you enter at 100 and the stop loss is 80 ie 20 pips away with a 20 pip step. If the price goes from 100 to 110 then 90 then 120 where you take your profit, then you will make 20 pip profit. This is because when the price moved from 100 to 110, the stop loss was still 80, because it was fixed 20 pips away in steps of 20 points. So when the price dropped to 90, the stop loss was not hit - this gives more room for the price to drop before coming back for a profit. BUT it also means more likelihood of going from profit to a bigger loss than if it were a dynamic stop loss. So you are paying for the risk of a bigger loss in return for more chance of a win.
Now, with the same price moves, if the stop had been a dynamic trailing stop loss, then when the price went to 110 the stop would be at 90 because that is the 20 point dynamic trailing. So when the price goes to 90, you would be stopped out at a 10 point loss and miss the subsequent gain as the price went to 120 - unless you happened to watch and re-enter the trade.