What are Stop Loss and Take Profit Orders in Forex?

What are Stop Loss and Take Profit Orders in Forex?

While the Forex market promises high gains, it can also cause losses as a result of uncontrolled and unconscious transactions. Several order types can be used by those who trade in Forex to make more controlled transactions. The most crucial among these are the take profit and stop-loss orders.

It is important to know how to set stop loss and take profit orders in Forex, but it would be problematic to act without knowing what take profit and stop-loss orders are. These two orders are among the most important elements of forex trading management.

What Do Take Profit and Stop Loss Orders Mean in Forex?

There are forex order types that investors use in line with their trading strategies. The most commonly used are stop loss and take profit orders. The reason for this is that it limits the opened transaction and is an easy intervention order.

There are hundreds of investment tools in the Forex market. These increase and decrease according to market conditions. However, these instruments do not have a certain increase or decrease rate. The concept we call volatility means that the opened trade shows excessive activity. When a volatile instrument is traded, if take profit and stop loss orders are not used, it will not be possible to gain from those transactions, and a loss may be experienced above the acceptable loss.

It is necessary to know how to calculate stop loss and take profit points in Forex, but it is very important to know that exits can be purely emotional. For example, investors can close a trade manually because they think the market will hit their stop loss point. In this case, although there is no reason based on the price action, they feel emotional and close the trade with their own hand as the market moves against the position they opened.

Stop loss is the type of order that is applied to limit the losses in the position the traders opened. The first thing that the trader who will use a stop loss should consider is to place this order at a reasonable level.

The purpose of an experienced Forex trader to use stop loss is to not lose more when a predetermined opening price level is reached and to have more balance for subsequent trades.
Take profit order is the case of closing the transaction by taking the traders’ profit when a certain price level is reached. These two orders are often used together. However, when anyone is applied, the other will be canceled automatically as the transaction will be closed.

The stop loss is at a point below the price the traders bought when the purchase was made. When a trader places a sell order, it is at a point above the selling price. The take profit point is above the price when the traders buy, and at a price point below the current price when they sell.

Another benefit of these orders is that the traders do not have to keep track of their open position. Because the system saves the order they give and automatically activates when there is price movement to the point you specify.

A stop loss order is an order type that is recommended to be used in trades with high leverage. Because if the price level goes against the direction they expect, it will cause their balance to decrease even more. Thanks to the stop loss order, the traders prevent unexpected losses and they will have a balance for the next transactions.

Therefore, the traders should prioritize identifying the stop loss position before determining their position size. In addition, they need to set their stop loss logically. Otherwise, the traders may become greedy and their transactions may result in loss.

It is possible to be deprived of the current profit by trying to earn a little more while in the forex market. The precaution to be taken to prevent this situation is the take profit order. Price volatility can cause a loss of profit if the trade is not closed from the required point. Therefore, it should not be acted upon by saying that it rises more or falls more.

How to Place a Stop Loss and Take Profit Order in Forex?

Take profit and stop loss orders can be given in a very simple way. However, most traders do not use these orders. Traders can enter these orders on the platform they use, either before they enter the trade or after they open the trade.

Below, there is a MetaTrader trading platform screen that shows how to place a stop loss and take a profit order.

MetaTrader trading platform screen that shows how to place a stop loss and take a profit order

Many Forex traders say that it is very important to know when to exit a trade before opening a position. Already experienced forex traders apply this. Novices, on the other hand, often do not know when to close the trade.
There are three different ways to determine the ideal stop loss. These:

  • Percentage Stop Loss: The traders set their stop loss based on the amount of capital they want to risk at a given moment. In this case, their stop loss will largely depend on their total capital and the amount of money invested. They do not set aside more than 2% of your trading capital for a single transaction.
  • Graphical Stop Loss: This method is more based on technical analysis. The traders’ support and resistance points guide them in determining the stop loss. One way is to set the stop loss away from the support and resistance levels. If the market breaks through these levels, they are in the opposite direction with the trend. In this case, they can prevent possible excess losses with stop loss.
  • Stop Loss by Volatility: As a matter of fact, volatility is not always negative. It can differ significantly from asset to asset and has a strong influence on transaction results. Knowing how volatile a currency pair is will greatly assist in determining the ideal stop loss point. Because volatile assets are considered high risk, they may require a higher range of stops.

The traders can also develop their own stop loss system by adhering to all of these or not. However, they should make their trading strategy taking into account the market conditions.

With stop loss and take profit orders, the traders do not have to wait until a predetermined price level. If the market starts to show negative price movements, they can feel free to close the trade. At the same time, they should not let their emotions interfere with transactions. The execution of a stop loss order is an indication that the traders are following a kind of the wrong strategy.

People can take profit orders, give traders a chance to get money at the peak of the trade. Taking profits at the right time is just as important as placing a stop loss in the right place. After all, the traders are doing these transactions to make a profit. It’s better to make a decent profit than wait and lose your potential profit.

The most crucial point of the take profit order is to choose the right moment and close the trade just before the trend reversal. The tools used in technical analysis help identify these trend reversal points.

The traders may keep in mind that stop loss and take profit orders are some of the tools in their rich trading portfolio. Trading skills are not limited to the use of indicators, stop loss and take profit orders. People should minimize the impact of their emotions on your trading. Knowing the basics of stop loss and take profit orders will help them to improve their trading skills.

SEE ALSO: What is the Difference Between Forex and Stock Market?

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