Trading in the forex market can be a profitable venture, but it can also be risky. One of the ways to minimize risk is by setting stop loss and take profit levels. These are predetermined levels that traders set to exit their trades automatically when the market moves against them or reaches their desired profit level. In this article, we will explain what stop loss and take profit are and how to set them in forex.
What are Stop Loss and Take Profit?
Stop loss and take profit are two types of orders that traders use to manage their risk and profits. A stop loss order is an instruction to exit a trade when the market moves against the trader beyond a certain level. It is designed to limit the trader’s losses if the trade goes wrong. On the other hand, a take profit order is an instruction to exit a trade when the market reaches a certain profit level. It is designed to lock in profits and prevent the trader from losing them if the market reverses.
How to Set Stop Loss and Take Profit in Forex?
Setting stop loss and take profit levels in forex is a straightforward process. The first step is to decide on the level of risk you are willing to take. This will determine the distance between your entry price and the stop loss level. The general rule of thumb is to set your stop loss level at a point where you will exit the trade if the market moves against you beyond a certain level.
For example, if you are buying EUR/USD at 1.1200, and you decide to risk 50 pips, your stop loss level will be at 1.1150. This means that if the market moves against you and reaches 1.1150, your trade will be automatically closed, and you will lose the amount you risked.
To set a stop loss order in forex, you need to go to your trading platform and select the trade you want to set a stop loss for. Then, right-click on the trade and select “Modify Order.” A new window will appear where you can set your stop loss level. You can either set a fixed stop loss level or a trailing stop loss level that follows the market price as it moves in your favor.
Take profit levels, on the other hand, are predetermined profit levels that traders set to lock in their profits. To set a take profit order, you need to decide on the level of profit you want to take and set your order accordingly. For example, if you are buying EUR/USD at 1.1200, and you want to take a profit of 100 pips, your take profit level will be at 1.1300.
To set a take profit order in forex, you need to follow the same steps as setting a stop loss order. Go to your trading platform, select the trade you want to set a take profit for, right-click on it and select “Modify Order.” A new window will appear where you can set your take profit level.
Advantages of Setting Stop Loss and Take Profit in Forex
Setting stop loss and take profit levels in forex has several advantages. The first advantage is that it helps traders manage their risk. By setting a stop loss level, traders can limit their losses if the trade goes against them. This helps them to preserve their capital and avoid blowing up their account.
The second advantage is that it helps traders lock in their profits. By setting a take profit level, traders can ensure that they exit the trade with a profit before the market reverses. This helps them to avoid giving back their profits to the market.
Conclusion
Setting stop loss and take profit levels in forex is an essential aspect of risk management. It helps traders to manage their risk and profits effectively. Traders should always set their stop loss and take profit levels before entering a trade and stick to them. This will help them to trade with discipline and avoid making emotional decisions that can lead to losses.
