What is Stop Loss and Take Profit

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Geofery

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Stop-Loss

Stop Loss is a feature on a trading platform that you can use to tell your Forex Broker when to close your trade. This particular feature tells the broker to limit losses on a particular open position or trade. Since it is not easy to sit around and monitor your open position, this feature could prove to be a safe haven.

Normally, when you notice that the market has started to move against you, your first instinct would be to close your trade to protect your capital. But if your eyes are not fixed on your trade, you could lose your capital. So you must set a Stop-Loss level. How much loss are you willing to accept for your trades? Think and then set the price level you want your broker to close the trade should the market move against you.

However, setting a stop loss can be very tricky. What if the market turns back and starts moving in your favor? You would have lost a huge opportunity. So, the ultimate importance of a stop-loss is to help you keep the position open until the market turns in your favor. You must identify the best price level to place your stop-loss.

In one of the lessons to come, you will learn how to analyze the market and know the closest logical level to set your stop loss.
For now, here is an example of how to place your stop loss. If the buy price for EURUSD is 1.1086, and you placed a buy order, you should set your stop loss below the current price. Count a minimum of 5 pips or more backward, 1.1081. If the the exchange rate falls down to 1.1081, it means you have lost 5 pips and since you have placed your stop-loss at this level, your broker will automatically close the trade for you to avoid further losses.

Take-Profit

Take-Profit is the opposite of Stop-Loss. It helps to control the greed in human nature. Yes, we humans are naturally greedy and don’t know when to stop accumulating money. We always want to get everything at a single opportunity. In Forex, many traders have fallen victim to greed. They don’t want to pull out when the market is in their favor and the market most times comes crashing back against their current position. Always know when to pull out of a trade when it is moving in your favor and wait for another opportunity.

If your eyes are not fixed on your trade, then use the Take-Profit option. Take-Profit is a tool to tell your broker how much profit you hope to get out of your trade, and when the profit has accumulated to that level, the broker will close the trade; your profit is secured.

If the price of buy EURUSD is 1.1086, and you placed a buy order, you should set your Take-Profit above the current price. Count a minimum of 5 pips upward, 1.1091. If the exchange rate rises to 1.1091, the broker will automatically close your trade and keep your Profit of 5pips secured. You can set your Take-Profit to any price level above the current price.

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Pariar

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Good explanation for basic risk management tools in trading. They are most commonly used and it is very wise to use them consistently, especially stop loss order. Market volatility can bring profits, but it also can be a driver of significant losses. With SL order, trader will be able to minimize it
 

vin2019

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Very nicely explained. I was aware of stop loss but take profit terminology is a new thing for me. Now, I understand it all better.

Setting a stop-loss is extremely vital for any trader. All traders must put a stop loss to minimize losses.
 

rofique

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Great clarification for fundamental hazard the board apparatuses in exchanging. They are most usually utilized and it is astute to utilize them reliably, particularly stop misfortune request. Market unpredictability can bring benefits, yet it additionally can be a driver of noteworthy misfortunes. With SL request, dealer will almost certainly limit it
 

Viaso

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Geofery, I really appreciate your effort to explain importance of SL and TP orders. Although I am not using TP orders, I try to use SL consistently. On a several occasions it has saved my money when market moves were sudden and relatively high.
 

Viaso

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I also think that volatility on forex market is very high and for this reason it is always necessary to use risk management techniques. I never risk more than 5% of my capital per trade and always set a stop loss order
 
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