How to Use Stop-Loss and Take-Profit Orders Effectively
Think about driving a high performance race car. Which two parts are the most important? The accelerator to go forward and the brakes to keep you safe. Forex trading is exactly the same. You need tools to take profits and tools to protect yourself.
The two most important tools a trader has is the Stop-Loss and Take-Profit Order. Using these on every single trade is a sure-fire way to separate the gambling from professional trading. This guide will outline in plain english what these are and how to use them properly and in a winning forex stoploss strategy.
What is a Stop-Loss Order?
Let’s take a look at the most vital one. A Stop Loss is an automatic order that you place with your broker, which tells them “If the price moves against me and reaches this price, close my trade immediately.”
View it as a safety net. Think of it as walking on a tightrope and if you fall the net will catch you. A stop loss catches your trade before it turns into a small loss into a train wreck of a loss.
It serves a simple purpose: protecting your capital. A professional forex stop loss strategy will ensure that no one trade can wipe your account. A stop loss is the underpinning of smart risk management.
How to Set Stop Loss in Forex
So, where are you putting this safety net? The question of where to set stop loss in forex is an important one. It shouldn’t be a wild guess. Here are the couple of more popular ways to figure it out.
- The Support and Resistance Method: This is the method most frequently used to determine stop loss. All you need to do is to look for key levels on your chart where price has had difficulty moving through. Saying you are buying, you put your stop-loss just below a recent support level. If you are selling, you place your stop-loss just above a recent resistance level. This gives your trade a logical point to be “wrong.”
- The Percentage Method: This method depends on your account size. You determine you are only going to risk a percentage of your account, say 1%, on any single trade. Next, you calculate the price level that is equal to a 1% loss in your account and set your stop there. This is a great forex stop loss method to keep you disciplined.
What is a Take-Profit Order?
A take-profit order is the opposite of a stop-loss. A take-profit order is an automatic order that lets your broker know, “If the price moves in my favor and reaches my target price, go ahead and close the trade and lock in my profit.” You could think of it as your finish line in a race. It is your predetermined goal.
A take profit strategy forex is designed to battle the emotional bias of greed. You may be tempted to hold on to your winning trade, hoping for more and more profit. A take-profit order keeps you true to your plan and keeps your profit.
The Trailing Stop Loss Forex
You should also be aware of a “smart” kind of stop-loss. Learning about a trailing stop loss forex order will change the game for you.
A trailing stop-loss is a stop-loss that will move up automatically for you, as your trade becomes more profitable.
Think for a moment that your trade is a winner. A trailing stop will essentially “follow” the price, locking in profits. If the price suddenly reverses, your trade will closed in profit, automatically as soon as it drops below your trailing stop. It’s a great way to let your winners run, while at the same time, being protected to take profits when the market makes a sudden turn.
The Right Broker Makes It Easy
When working with a good broker, implementing a great stop loss strategy in forex is easy. The broker’s platform should make sure these types of essential risk management orders are easy to set and reliable.
- For the beginner learning how to set a stop loss in forex, a simple platform from a broker like Capitalix or SmartSTP is advisable.
- These orders have to be executed immediately. There are brokers, such as FX Road and Trade EU Global, that have reliable technology to ensure your orders are filled at the price you intended.
- For dedicated traders that may use sophisticated orders like a trailing stop loss forex, there are brokers like CapPlace and the ECN broker FirstECN who offer professional trading platforms with advanced features.
- The great brokers are always innovating. You can see this from companies like SuxxessFx, Tradgrip or of course Algobi. They are also at the top of the game with their smart trading platforms that can make trading and risk management easier than ever.
The Power of the Risk/Reward Ratio
A winning forex stop loss strategy applies to your take profit strategy forex. This is your Risk/Reward Ratio. It’s a simple thing to compare:
- The risk is how much you could lose (the distance to your stop-loss).
- The reward is how much you could win (the distance to your take-profit).
A good rule of thumb is to only take trades where your potential reward is at least double your risk (1:2 ratio). Even if you only win 50% of your trades, you could still be profitable.
Conclusion
Utilizing Stop-Loss and Take-Profit orders should not even be a choice. It is the essence of being disciplined as a trader. Your stop loss is your defense, your take profit is your offense. You need both to be successful.
Promise yourself that you will use a stop-loss order and take-profit order on every trade that you execute. It is the best Forex stop-loss strategy, by far, and will lead you to become consistently successful trader in the long run.
FAQs
- Should I use a stop-loss on every single trade?
Yes, absolutely. It is the most important risk management tool you have. A professional forex stop loss strategy means never trading without a stop-loss.
- What is a good risk/reward ratio?
A good starting point is a 1:2 risk/reward ratio. This means you are aiming to make a profit that is at least twice the amount you are risking.
- How does a trailing stop loss forex order work?
It’s a dynamic stop-loss that automatically moves in your favor as the trade becomes more profitable. It helps to lock in profits while letting your winning trades continue to run.
- How do I decide where to place my take-profit order?
A common take profit strategy forex is to place your take-profit order at a key resistance level (for a buy trade) or a key support level (for a sell trade).
- How do I learn how to set stop loss in forex correctly?
The best way is to open a free demo account. You can practice setting these risk management orders on a live chart with virtual money, so there is no risk while you are learning.