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Forex why is buy order stop loss above take profit?

Forex trading is one of the most popular ways to make money online. However, it can be a challenging field for beginners. When placing a trade, traders have to decide where to place their stop loss and take profit orders. It may seem counterintuitive, but in Forex trading, it is common to place the buy order stop loss above the take profit.

To understand why this is the case, it is crucial to first understand what a stop loss and take profit order are. A stop loss order is an order placed with a broker to sell a security when it reaches a certain price. The purpose of a stop loss order is to limit the trader’s loss in case the market moves against them. On the other hand, a take profit order is an order placed with a broker to sell a security when it reaches a certain price. The purpose of a take profit order is to lock in profits when the market moves in the trader’s favor.

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Now, why is it common practice to place the buy order stop loss above the take profit order in Forex trading? The answer lies in the nature of currency markets. Forex markets are highly volatile and can fluctuate rapidly. In other words, currency prices can move up and down quickly and unpredictably.

When traders place a buy order, they want the market to move in their favor so that they can make a profit. However, there is always a risk that the market will move against them. This is where the stop loss comes in. Placing a stop loss order above the take profit order means that if the market moves against the trader, they will exit the trade before their losses become too significant.

Placing the stop loss above the take profit order also helps traders avoid premature exits from a trade. If the stop loss were placed below the take profit, the trader may exit the trade too early, missing out on potential profits. By placing the stop loss above the take profit, traders can give their trades more room to breathe and potentially make more money.

Another reason why the buy order stop loss is commonly placed above the take profit is to account for spreads. A spread is the difference between the bid and ask price of a currency pair. When traders place a trade, they have to pay the spread to their broker. If the stop loss were placed below the take profit, the trader would have to make up for the spread before they could start making a profit. By placing the stop loss above the take profit, traders can cover the spread and still make a profit if the trade goes in their favor.

In conclusion, placing the buy order stop loss above the take profit may seem counterintuitive at first, but it is a common practice in Forex trading. This is because Forex markets are highly volatile and can fluctuate rapidly, and placing the stop loss above the take profit can help limit losses in case the market moves against the trader. Additionally, placing the stop loss above the take profit helps traders avoid premature exits from a trade and account for spreads. Ultimately, traders should experiment with different stop loss and take profit strategies to find what works best for them.

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