How do you use stop loss and take profit? If you have read anything about Forex trading or have ever been involved in it, then you have surely heard of stop loss and take profit orders. The two are widely used in the foreign exchange market. But you may be wondering how they work and if they really can help you make more money. Well, let’s start with a little explanation. These two terms are not the same thing.
A stop loss order tells the trader to sell a certain currency pair once the current price of that currency pair reaches a certain limit. In short, stop loss limits the amount of profit that a trader will be able to make in any given trade or position size.
How do you use stop loss and take profit?
The profit target is often set at a level which is not recommended by the major currency traders. These orders are normally placed with brokers in conjunction with other orders to help those who are new to the market or are inexperienced. However, some of the biggest banks use them as well.
On the other hand, a stop-loss order tells the trader to buy a particular currency pair at a certain price. This action automatically stops trading once the target price has been reached. Usually, this type of order will also instruct the broker to lock in profits automatically.
The lock in profits automatic procedure can be triggered by various factors such as a change in the volatility of the particular market, news events, economic data release and other such factors. Some brokers offer this feature in their services, while some do not.
Stop loss orders and lock in profits are both designed to protect the trader from severe losses in their trades. The stop loss order is designed to get a trader out of a trade if it reaches a certain loss which is above the stop-loss level. Lock in profits allows a trader to lock in profits at the beginning of every trading day and be assured that the trader will receive his money back in his account.
Both types of orders are based on the same mathematical algorithms; however, the stop-loss function and the lock-in profits algorithms used by different traders are calculated differently.
When you enter a trade, your stop-loss target is the maximum amount of cash you will lose in any one trade. The stop-loss target is determined by a combination of your stop-loss target and your take-profit target. Your take-profit target is the maximum amount that you would profit from a successful trade.
If your target is reached, your stop-loss order will be set to get out of the trade before your profits get wiped out. The reason why you set the stop-loss is so you can cut losses when they start to get big.
How does a stop-loss order work?
If a trader wants to get out of a position quickly, he must “get out” using a stop-loss order instead of covering his open position. In order to “get out” a position quickly, the trader must either close his open positions or cover his stops using a stop-loss order.
The only way to properly do this is to follow the same mathematical formula (assuming a constant stop-loss) that determines the maximum amount you can lose in any open position and determine the maximum amount you can make when you cover your stop-loss.
For instance, if you take a loss of two dollars per trade, you can never make more than four dollars in one day. Setting the stop-loss to two dollars ensures you will not lose more than two dollars per trade in a day while setting the profit target to ten dollars ensures you will not make more than ten dollars in a day.
This is a great example of how a trader should use his stop-loss order when he is using the Forex Megadroid, when using a standard or fixed rate strategy, and in order to stay at the top of his game.