Questions about take profit and stop loss: "What is it? How to determine them correctly?" - every trader is worried, only professionals and beginners relate to this differently. For the former, it is characteristic to hone their own strategy to the ideal. And the latter are engaged in the theory of quickly jumping from one trading option to another, often not paying due attention to the deal’s limiters.
Limit loss and profit
The main question that arises for a trader after opening a transaction? about how to determine the values of stop orders in order to:
- profit was maximum;
- losses were the smallest.
Each beginner is interested in the concepts of take profit and stop loss. What are these terms and for what purpose are they used? These are the constraints without which successful trading is impossible. If available, transactions are closed automatically, and this happens at pre-set price values.
Take Profit - profit fixing level. That is, first, by analysis, the trader determines the value that the price will reach. And sets take profit at the level of getting profit from the market.
Stop loss is intended to limit losses. It is used to save capital in case of a failed transaction. That is, the trader deliberately determines the permissible level of losses and sets a limiter on it.
Stop Loss for Profit
There are exceptions to each rule, this also applies to Forex. Stop-loss and take-profit are the tools from which you should always get the maximum benefit. It's no secret that the most successful transactions are made at a trend reversal. If it is clear that the direction of the movement will continue for some time, then closing the order is not practical.
In this case, you need to move the stop loss along the trend. As a result, it will be possible to fix the profit. That is, the price in any case will turn around and go down, but the trader will still win. Although not as large as planned in the analysis. This method shows how to set stop loss and take profit in order to use them for profit.
This does not have to be done manually. It is enough to set the trailing stop function available in the terminal. When it is activated, the stop loss price is automatically followed. To do this, right-click on an open order to open the context menu, then “trailing stop” and find the desired value. Its smallest level that the system offers is 15 points.
Margin call as a stop loss
Traders with significant experience in the market can adhere to an aggressive work style. They use margin call as a stop loss. In this case, the transaction opens with a large lot.
If the price reverses in the opposite direction to the planned one, then large losses are expected. They are limited to margin call. In the case of a correct forecast and profit of 10-20 points, there is an increase in the deposit by 6-15%. When triggered margin call losses are 10-15%. That is why the method does not need to be applied to beginners. It is understandable and acceptable for experienced traders involved in scalping and pipsing.
Questions addressed by traders
Daily traders face the following problems:
- The price does not reach the limiter of profit.
- The trend interrupts it and continues to move (lost profit).
- Price often affects stop loss.
- Permanent losses.
That is, setting a stop loss and take profit is an integral part of the activities of any trader. Traders should constantly improve their skills, working to fix these problems and prevent them as much as possible.
Stop loss and take profit are selected depending on various factors.
The correct definition of delimiters depends on the strategy. But even within the framework of one trading method, setting stop-loss and take-profit can vary. Each trader is gradually creating an acceptable strategy only for him.
Beginners, first of all, study a fixed stop loss and take profit. What it is? In fact, nothing complicated. Limiters are set at a predetermined distance from the sale or purchase prices, regardless of the situation and asset. At 100 pips (take profit) 50 pips (stop loss), the goal is to capture part of the movement. This method does not imply determining the potential of the trend. The method has established itself in practice as the most acceptable for beginners.
Guided by Fibonacci levels, time zones, round numbers and other methods, you can determine stop loss and take profit. What is it if not the correctness of the actions taken, knowledge of the strategy and market situation? You need to understand that the point here is not how these values are set. And the correct use of the selected method.
The previous minimum (maximum)
If the stop loss is set at the previous minimum or maximum, then the goal is to prevent its false operation. It happens that the loss limiter is placed at a distance of 50 points (fixed). At the same time, it constantly gets lost in price, but after that the trend reverses and moves again in the previously predicted direction. It turns out that with the correct forecast of the direction of movement, the trader suffers a loss. This is very unpleasant, since it would seem that the take profit and stop loss are correctly determined.
"What is this obstacle and how to deal with it?" - a question that has always worried traders. The solution is to move the stop loss all the time for the price to the new emerging lows and highs. The result is the closing of the deal by the limiters, but in any case in a positive way.
Take profit on rebound and breakdown
Guided by the lines of support and resistance, you can successfully open a deal, and take profit to position in any of two ways:
- When the price bounces off the trend lines. When a deal opens when the chart is beaten from the support level, a stop loss is located behind it. This helps to reinsure yourself in case of a possible breakthrough at the price of a trend line. The same applies to the level of resistance.
- With the breakdown of trend lines. If a deal opens when a support level is broken, a stop loss must be placed near the resistance line and vice versa.
What is convenient trailing stop?
In order not to monitor the market continuously, moving the loss limiter, you can apply a trailing stop. Its value remains constant, since it is placed at a certain distance from profit and moves behind the price in accordance with this indicator. That is, this implies a profit taking when the price increases by 35 or 50 points. When the chart is reversed, the trader clearly remains in profit or closes the breakeven transaction.
Trading on highly volatile pairs requires the use of an improved type of trailing stop. In such programs, its value moves after the price passes the number of points indicated by the trader, for example, every 50.
How to determine take profit and stop loss?
The quality of work depends not only on the correctness of the tools, but also on the nature of the trader. Therefore, only depending on your own preferences, you need to choose a system by which take profit and stop loss are determined. What does this mean? The selected limiters are calculated depending on the strategy. At the same time, the work systems of all traders differ from each other.
Do not ignore stop loss, hoping that it will be possible to manually close the deal on time. In cases of increasing minus, a novice trader can hope for a reversal of the chart or believe that it is not necessary to use this order. After all, suddenly the deal will close, and the price will again unfold in the right direction. After repeated loss of the deposit, the views change. And to avoid internal disagreements, stop loss must be used.
How to set stop loss and take profit, tips suggest:
- Limiters should always be used.
- The ratio of stop loss and take profit to each other should not be less than 1: 2, preferably 1: 3. That is, when the stop loss is located at a distance of 50 points from the purchase price, the take profit should be 100 points, at least.
These orders close the contract after the price reaches a certain level. It does not matter if the working computer is turned on.
Setting Stop Loss
There are several ways to define a loss limiter. One of them is to identify the lows and highs on the price change chart. And for this it is necessary to build a trend. For an upward chart, a buy transaction is opened, while the minimum points are analyzed. In a downtrend, one should be guided by highs. Then, if the largest channel width is 30 points, then the stop loss value is the same.
You can also be guided by trend lines. In this case, the stop loss is placed at a distance of 10 points from the support line in the buy transaction.
Limiters can be set depending on the type of currency:
- GBP is 30–35 pips
- CHF - 30–35 p.
- EUR - 25-30 p.
In this case, the volatility of currency pairs is taken into account. You need to be based on the daily indicator and place a stop loss at a distance of 30% of this value. If EUR / JPY has a volatility of 60 points, then stop-loss is 20 points. This method is acceptable for time intervals of at least 4 hours.
If the price moves in the right direction, then the profit should be fixed. To do this, the stop loss order is transferred closer to the current price value. Therefore, for a new point of its installation in an uptrend, you should choose the minimum closest to the current price.
Take Profit Definition
The greatest value of the function is manifested in cases of instant contact with the price at the proper level. When she does not linger on this value, but only touches it once, the trader is physically unable to respond. Science must be mastered, as setting a stop loss and take profit is a whole art, and the result is really worth the effort.
You should always consider that take profit must exceed the stop loss of the same transaction. That is, with the same number of successful and unprofitable orders, profit should be obtained.
Tips for Take Profit:
- It is best to set a profit limiter before the expected trend reversal, using the constructed price channel in the calculation.
- For the upward movement, the reverse approach is used. You need to set take profit at a point of approximate maximum before a new rollback.
- By analogy with stop loss, take profit can be set based on the volatility of a currency pair. But for this you need to correctly predict the trend movement.
How to place orders automatically?
To facilitate the installation of limiters, an indicator exists. Stop-loss and take-profit are determined when the system opens a position, which greatly facilitates the work. This method is very convenient, especially on specialized websites for downloading a huge amount of free programs.
To set automatic stop loss and take profit, you can use the adviser. After installing the program, two bars are displayed on the chart: blue (take-profit), red (stop-loss). Special settings allow you to make the program work in accordance with the preferences of the trader.
In fact, setting limiters manually disciplines traders, accustoming them to systematic work on the basis of a previously drawn up trading plan. Before opening a position, a trader must carefully analyze the market situation.
If you learn how to set stop loss and take profit, you can increase the number of profitable trades. The correct setting of stop loss and take profit is the key to successful trading. I would like to wish all traders more orders closed at a correctly set take profit.