Stop Loss and Take Profit – Trailing Stop

Stop Loss and Take Profit - Trailing Stop

Stop Loss and Take Profit are among the most important risk management tools most traders use on a daily basis.

A thorough understanding of them is essential for any Forex trader. However, Take Profit and Stop Loss are not unique to Forex.

On Forex platforms, you can set these levels for all CFD assets such as stocks, Forex , digital currencies and commodities.

We will see how to correctly set Stop Loss and Take Profit. Together we will discover the meaning of Stop Loss and Take Profit and see how they can be applied in practice.

What are Stop Loss and Take Profit?

Stop Loss is the level at which a trader wants the position to close automatically.

take Profit works similarly: setting this level means signaling to the broker that you want your position to be closed at that level once it is reached.

take Profit it is an amount that a trader chooses as appropriate or sufficient if the trade goes in his favor.

If this specific profit level is reached, once the Take Profit level is triggered, the trade will be closed automatically.

Stop Loss is the acceptable level of loss a trader is willing to take if the trade goes against his prediction.

If the defined Stop Loss level is triggered, the trade will be closed automatically, preventing the possible loss of the total investment amount.

Pros and Cons Stop Loss and Take Profit

It may not be entirely clear why a trader would need to set these levels instead of trading without them. In fact, these tools have pros and cons, so let's take a closer look at them.

Pros:

  •  Setting Stop Loss and Take Profit can help traders manage the risks associated with trading. By setting limits, traders can operate better with the amounts of losses and results they deem sufficient.
  • Managing losses at the right time can prevent further losses.
  • There is no need to monitor the trade once the levels are applied as they will be triggered automatically.
  • Using self-closing levels helps to eliminate the emotional factor, i.e. the desire to hold the asset for “a little longer”.

Cons:

  •  Rapid price changes can result in slippage causing the trade to close further from the set loss limit. However, slippage can also work in the trader's favor, resulting in the position closing above the initially established Take Profit level.
  • SL and TP orders can be triggered by a short-term price fluctuation, causing an unnecessary sale of the asset.
  • Take Profit can limit potential profits if the price continues to move in the trader's favor.
Stop Loss and Take Profit are among the most important risk management tools most traders use on a daily basis.

Slippage is an English term that, literally translated into Portuguese, would be a “slide”. The term is used to designate a situation in which the investor (or trader) makes a financial transaction but is unable to execute exactly the price he intended. A purchase, then, ends up being more expensive than planned (and the same happens, analogously, with a sale).

How to establish Stop Loss and Take Profit levels?

Let's see an example on an MT4 platform — The first and easiest way to add Stop Loss or Take Profit to your trade is to do so immediately, when placing new orders.

How to set Stop Loss and Take Profit levels

To trigger, you just have to enter your specific price level in the Take Profit or Stop Loss fields.

Remember that Stop Loss will run automatically when the market moves against your position (hence the name: stop loss), and Take Profit levels will run automatically when the price reaches your specified profit target.

This means you can set your Stop Loss level below the current market price and Take Profit above the current market price.

It is important to point out that a  Take Profit (TP) or Stop Loss (SL) is always connected to an open position or a pending order.

You can adjust both as long as your trade has been opened and you are monitoring the market.

It is a protection order for your position in a trade, but of course they are not required to open a new position.

You can always add them later, but we highly recommend always securing your trades*.

Adding Stop Loss and Take Profit Levels

The easiest way to add Stop Loss and Take Profit levels to your already open position is by using the trade line on the chart. To do this, simply drag and drop the trade line up or down to a specific level.

Adding Stop Loss and Take Profit Levels

After entering Stop Loss and Take Profit levels, Stop Loss and Take Profit lines will appear on the chart. In this way, you can also change the Stop Loss and Take Profit levels simply and quickly.

You can also do this in the lower 'Terminal' module. To add or modify SL/TP levels, simply right-click on your open position or pending order and choose 'Modify or Delete Order'.

Stop Loss and Take Profit

The order modification window will appear and now you can enter/modify Stop Loss and Take Profit by the exact market level, or by setting the point range from the current market price.

Stop Loss and Take Profit are among the most important risk management tools most traders use on a daily basis.

The purpose of SL is to reduce losses when the market moves against your position, but they can also help you to lock in your profits.

While it may seem a bit counterintuitive at first, it is actually very easy to understand and master.

Let's say you opened a long position and the market moves in the right direction, making your trade profitable at the moment.

Your original Stop Loss, placed at a level below your opening price, can now be moved to your opening price (so you can match) or above your opening price (so you are guaranteed a profit) .

To make this process more automated, you may choose to use a Trailing Stop.

This can be a really useful tool for your risk management, especially when price changes are fast or when you cannot constantly monitor the market.

As soon as the position becomes favorable to you, your Trailing Stop will automatically follow the price, maintaining the previously established distance.

Trailing stops (TS) are fixed on your open positions, but it is important to remember that if you have a trailing stop on MT4, you will need to have the platform open for it to run successfully.

To set a Trailing Stop, right-click on the open position in the 'Terminal' window and specify the desired pip value of the distance between the TP level and the current price in the Trailing Stop menu.

Trailing Stop

Your Trailing Stop is now active. This means that if prices move to the profitable side of the market, Trailing Stop will ensure that the stop loss level will automatically follow the price.

Your Trailing Stop can be easily turned off by setting 'None' in the Trailing Stop menu. If you want to quickly deactivate it on all open positions, simply select 'Delete All'.

As you may have seen, MetaTrader offers several ways to protect your positions in just a few moments.

* While Stop Loss orders are one of the best ways to ensure that your risk is managed and that potential losses are kept to acceptable levels, they are not 100% safe.

Stop Loss orders are free to use and protect your account against adverse market movements, but be aware that they cannot guarantee your position every time.

If the market suddenly becomes volatile and gaps beyond your stop level (jumps from one price to another without trading at the intermediate levels), it is possible that your position may be closed at a worse level than requested by you. This is known as a price slip.

Guaranteed Stop Losses, which have no slippage risk and guarantee that the position is closed at the Stop Loss level you requested even if a market moves against you, are available free of charge with a demo account.

Take Profit and Stop Loss Calculator

How to decide on the level of TP and SL orders?

Generally, investors decide at what levels they feel comfortable working.

The SL will largely depend on the investment amount and the total capital the trader is working with. Traders can use support and resistance levels as reference points.

The calculator allows you to calculate a value based on your investment, which can be convenient both for defining an SL and for certain commercial approaches (for example, the Martingale strategy).

Summary About Take Profit and Stop Loss

When the Take Profit and Stop Loss features are explained, it is possible to understand why they are so useful.

These levels can help any trader who is serious about managing risk.

It is important to make a detailed analysis of the risks associated with each type of operation, and define an adequate exit plan if the probabilities are considered high.

Track market movements daily, and identify all potential risks associated with your operations.

 

5 / 5 - (5 votes)

Related Posts

error: