Stop loss, Take Profit and Trailing Stop
Stop loss, Take Profit and Trailing Stop

Trading platforms such as MT4 and MT5 have a lot of order types that one as a trader can take advantage of. Take profit is one of the order types commonly used to target a point in which you’d like your position to be closed in profit, The system automatically liquidates your position when the market price hits your target profit.

In a buy position – your take profit level will always be located above the opening of the position. When you buy, you expect your levels to go higher and thus making a profit, when the targeted level is hit, your profit will be secured, and the position will be closed, and in this regard, the open BUY/LONG position is based on ASK, because the ASK is the trader’s buying price.

In a sell position – your take profit level will always be located below the opening of the position. When you sell, you expect your levels to go lower and thus making a profit, when the target level is hit, your profit will be secured, and the position will be closed, and in this regard, the open SELL/SHORT position is based on BID, because the BID is the trader’s selling price.

Examples

Buy EUR/USD at 1.3800 (In this case, because your profit level is located above, you have to set the price higher, depending on your target point). If you want to profit 80 pips/points – You set your profit level at 1.3880

Sell EUR/USD at 1.3800 (Conversely, your profit level is located below, you have to set the price lower, depending on your target point). If you want to profit 80 pips/points – you set your profit level at 1.3720

Should the above example go against you, you need to familiarise yourself with a Stop Loss – which is used to protect yourself from blowing your account. It is an order to limit potential losses. Using a stop loss – is very advisable because forex is very risky and you might just lose all of the hard-earned deposit. Taking precautions is very advisable.

Unlike with the Take Profit, in the BUY/LONG position, your stop loss level is always located below the opening price of the position. This minimizes the risks involved in Forex because anything can happen and thus is always great to take these precautions and be consistent, as it’s key to being one of the best traders.
You can limit and tolerate a certain amount of loss should the market go against you.
With the SELL/SHORT position, your stop loss level will always be located above the opening price of the position.

Examples

Buy EUR/USD at 1.3800 (In this case, because your Stop Loss level is located below, you have to set the price lower, depending on your stop-loss point). If you want to tolerate 80 pips/points of a loss – You set your Stop loss level at 1.3872

Sell EUR/USD at 1.3800 (Conversely, your stop loss level is located above, you have to set the price higher, depending on your stop-loss point). If you want to tolerate 80 pips/points of a loss – you set your SL level at 1.3880

If you have forgotten to set your limits, you can be able to modify your position, take full advantage of the stop loss and use it to lock your profit – this can be done by moving the stop loss up (for an open BUY/LONG position) or down(for an open SELL/SHORT position), and that automated adjustment feature is known as the Trailing Stop.

Trailing Stop moves the stop loss upward (BUY/LONG position) or downward (SELL/SHORT position) to lock your profit.

Examples

  • Buy EUR/USD at 1.3800
  • Stop-loss – 1.3872 (-80)
  • Take Profit – 1.3800 (+80)

Should the open position be on your favor, and moves a possible 50 pips, you can move the stop loss level to about 20 pips less of the 50 pips profit, this locks your 20 pips profit should the up moving level return. This also gives you an opportunity to move the TP even further to about +100 pips to maximize your profit.
This can be done by monitoring your open trades.

Pros and cons of using the Stop Loss, Take Profit and Trailing Stop

Pros

  • Protect your capital
  • Lock your Profit
  • Maximize your profit
  • Lower the risks of losing all your capital

Cons

  • The levels might touch down your Stop Loss just before changing direction again.
  • Take Profit might be a lot higher than your targeted level.
  • The market of the currency pair of your open position might hit your TP before changing direction again.

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