This article talks about how you can successfully make use of the stop loss and the take profit orders while trading forex. These orders are exceedingly essential towards helping you to do proper management of forex risks and helping you to close trades in profits.
Stop loss order is utilized by a trader to automatically close an open position, when trade is moving against him or her. You can choose a particular price level above which you do not want to stay in the trade. As soon as that price level is attained for the particular currency pair you buy or sell for a specific time period, the broker will automatically close your trade.
By setting your stop loss with your broker, you don’t need to exit trades manually rather your broker automatically closes your trade as soon as the price reaches the level you set. The stop loss is at all times positions in the opposite direction of your trade:
- When you go long (the implication is that you anticipate that the price of the currency pair will rise), your stop loss ought to be set underneath the present rate of the currency pair.
- When you go short (The implication is that you are anticipating that the price of the currency pair will fall), you’d need to set the stop loss on top of the present price level of the currency pair.
The benefit of this forex trading method is to reduce your losses in the event that the price starts to trend against your expectation and in the opposite direction.
For instance, if the present exchange rate of EUR/USD currency pair is 1.0823 and you open a long position, you could place your stop loss at 1.0783.
If your guess is right and the price did not fall, the stop loss order would not be executed. However if trade goes contrary to your expectation and the currency rate begins to fall, as soon as it falls to the 1.0783 level, your broker will immediately close your position to prevent you from incurring additional loss.
Forex losses are inevitable. However, with the use of stop loss, you will be limiting your loss to the barest minimum by pre-setting a calculated amount that you can comfortable bear.
It will be hard for you to limit your loss if trade goes against you if do not preset your stop loss. In this way, stop loss help you to determine the maximum amount of loss you can tolerate. However, you also have the choice of manually closing your position before the price falls to your stop loss level to further limit your loss if you think that the price fall would reach your stop loss level.
While the stop loss limits your loss, the take profit order also automatically help you to cash in your profits. It is basically the opposite of stop loss and works exactly like a strop loss in the opposite direction.
You need to preset the price level in such a way that when the position is attained your trade position would automatically be closed b y your broker. The way to go about it is to figure out what your potential gain on that particular trade is likely to be and as soon as you get to that price level, your broker closes the trade in much the same way as the stop loss.
It is essential to always implement a stop loss with the take profit order. This is why: If for instance, you opened a long trade on the EUR/USD pair by buying at 1.0823 price level and your stop loss order is at 1.0783, and you did not set a take profit order. If what you have invested is 100 USD and you are trading with a leverage of 1:100. When the price rises to 1.0871, you would be earning a profit of 48 USD in this instance, but you choose not to sell because you anticipate a higher gain. The price can rise as high as 1.0899 and just in a moment, it falls beneath to 1.0842 (gain = 19 USD). If the price fall moves a bit further, it would make you to lose the profit you have already acquired.
However, if you have a preset take profit order at 1.0863, you’d be able to make a profit of 40 USD as soon as the price level is attained.
This is an illustration of how the take profit order can prevent you from losing out the profits you make while trading forex.