HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Curbing your losses with Stop Loss and Take Profit


Trading on a stock exchange is always connected with great risks. That’s where Stop Loss and Take Profit come into play: these are helpful tools used by traders to minimize potential losses and maximize profits. Today, we’re going to find out how they work.

Stop Loss and Take Profit are protective orders set to automatically close a trade in order to limit losses and protect profits, respectively. In other words, these are signals to the broker to sell or buy your assets when their price reaches a certain level.

With a long position, Take Profit is set above the current price, and Stop Loss is set below it.

Here’s an example. A trader buys Apple shares at $112 each and wants to sell them at $115. In this case, they set Take Profit at $115. Also, the trader doesn’t want to lose more than $2 to market fluctuations, and accordingly sets a Stop Loss of $110.

With a short position, Take Profit is set below the current price, and Stop Loss is set above it.

Let’s go back to the trader with the Apple stock. He goes short on Apple at $150 per share and wants to buy them back when the price drops to $120. In this case, Take Profit should be set at $120 and Stop Loss at $200 to avoid any serious losses.

The main purpose of setting these restrictions is to control the trading process when the trader is away from the terminal and doesn’t have an opportunity to continuously monitor the price fluctuations, or opens long-term orders. The market is volatile and does not forgive mistakes. Even the most seemingly lucrative trade can result in a major loss in a matter of minutes if the trader neglected the precautions.

All experienced traders understand the importance of Stop Loss and Take Profit as safety tools and actively use them. But novice traders often neglect these rules, which is why they doom themselves to constant losses.

Stop Loss and Take Profit set useful limits when trading in a volatile market, as well as in case of news trading. They are not limited in time and are valid until the trader cancels them. You can even set several Stop Losses or Take Profits for each asset. The advantage of a pre-set Stop Loss or Take Profit is in the ability to close an order automatically, which means it doesn’t require the constant attention of the trader behind the computer or on the phone. Long-term trading without limit orders is very dangerous even for an experienced trader.

The use of the Stop Loss is considered to be especially important, because large losses are significantly worse for the trader than ending up without the profit. Moreover, Stop Loss can replace Take Profit if the trader adjusts it up according to the price. A trade can be closed by Stop Loss, but the fixed profit will remain in the account. At the same time, ignoring the Stop Loss can lead to severe losses, resulting in a margin call (a broker’s requirement to deposit additional funds into the account lest the position be closed) and even zero balance and closed account.

How to calculate the value of Stop Loss and Take Profit?


First, you need to determine the Stop Loss. After that, you can calculate the Take Profit in order to maintain the correct ratio of potential profit and loss. Usually, it’s at least 1 to 2 (the more, the better). Establishing a profit cap is also important. Experienced traders warn not to overestimate the level of profit taking, since the price of an asset simply may not reach it in a volatile market. Important news releases, for example, can strongly affect the price of an instrument, including major currency pairs involving the US dollar.

Be sure to take into account the volatility of a particular trading instrument, which may differ depending on the day or time. In case of intraday trading, you can also check the readings of oscillators—indicators that help predict possible changes in the price direction. In addition, significant levels of support and resistance (narrow price corridors formed between several local highs and lows) and psychologically significant round levels can act as profit taking levels, while local highs and lows, as well as Fibonacci retracement levels can be used to finalize the transaction.

Knowledge of Stop Loss and Take Profit is beneficial to all participants in Forex trading. They are actively used by both professional traders and RAMM investors.

With the proper use of these tools, the foreign exchange market can become a good source of passive income that doesn’t require a permanent presence in the trading terminal.

#source


RELATED

Risk Management on Forex: Basic Rules

Senior traders would say that there is no chance to build a successful career without risk management. Whatever your trade duration is, the trade should...

Biggest Mistakes to Avoid as a Beginner Trader

One of the things learned on the trading floor is that the most crucial part of the success formula is to accept a loss. It’s how traders gain an additional profit and an edge against others...

A Guide to Demo Trading Accounts

Embarking on your trading journey is akin to stepping into a vast, dynamic universe with its own set of rules. Whether you aim to explore the realms of forex, delve into precious metals...

Liquidity: How to Find the Right Assets and Markets

Liquidity is a common term in the financial world. Market liquidity determines the speed of market operations and an investor's ability to earn money on a specific asset...

Ultimate guide to trading Bitcoin for beginners

Bitcoin is the world’s first cryptocurrency that paved the way for the multi-trillion dollar crypto market we can trade and invest in today. Read on to learn everything you need...

Understanding the Piercing Candlestick Pattern in Trading: Benefits and Limitations

The vast world of trading is replete with countless patterns and technical indicators, each promising its own set of advantages. Among these, the piercing candlestick pattern stands...

Stocks: Top-5 of what you'll want to trade

If you look at the currency charts, they may seem chaotic most of the time. On any timeframe, be it long-term, mid-term, or short-term. The basic reason for that...

The Advantages of Commodities Trading

Commodity trading relates to the buying and selling of a large range of instruments including oil and gas, metals and cocoa, coffee, wheat and sugar. Commodities are categorised as hard and soft...

What is Spread, and Are You Better Without It?

Spread is a central element in Forex trading. Traders are keen to know and ask a lot of questions about it. While spread exists in various sectors of the financial market...

Know Your Heroes: Successful Traders of Modern Era

We bet you've heard many times that a great journey starts with a small step. What if we say that success is just a journey, not a final destination. But where you have to...

How To Trade Forex: A Beginners' Guide

Are you wondering how to trade Forex? This article helps you through the insights of the Forex market. FX is one of the largest financial markets in the world...

Trading styles

Like every other trader, whether you are a novice trader or talented expert in the field of trading forex, you come with your own unique trading style. No two traders are alike...

Crypto and NFTs: The New Age of Art

Crypto and NFT art can be an even more promising pair for the future of art as a whole. Fiat currencies and art have both been around for a long time. We are equally...

Forex Trading - The Actual Financial Solution

Forex trading has proven to be a steady source of income for many traders across the globe. The amazing statistics in 50+ Forex & Trading Industry Statistics...

Trading on Forex: A Primary Source of Income

There are a lot of discussions about trading within the boundlessness of the Internet, both in conventional businesses and state-financed organizations. People say...

Embarking on ETF Trading: A Beginner's Guide

Entering the world of Exchange Traded Funds (ETFs) trading might appear daunting to newcomers, but it's a surprisingly accessible endeavor, thanks to the abundance of online resources and tools available today...

IronFX: Leverage in Forex. Complete Guide

Leverage is simply borrowed funds that traders use to trade. In other words, it refers to the ability that traders have when opening an account with a forex broker...

The gamification of trading and the case for financial literacy

Trading apps are attracting younger audiences with new investment approaches and appetites, sparking knee-jerk reactions from regulators and media...

Bullish vs. Bearish: What's the Difference?

Bull vs bear describes investment trends that have the power to impact the global financial markets. You've probably heard investors refer to a market...

Seven Tips for Trading Gold Forex (XAU/USD)

Trading gold forex (XAU/USD) has become more popular as forex, silver traders or metal traders look for positions that have the potential to go against inflation or market volatility...

FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.