When trading forex, it is important to use stop loss and take profit orders to limit your losses and lock in profits. A stop loss order is an order to sell a currency pair at a certain price, below the current market price. A take profit order is an order to buy a currency pair at a certain price, above the current market price.
Stop loss and take profit orders can be placed with your broker when you open a trade. You can also place them after you have already opened a trade. To do this, you will need to use the trading platform of your broker.
How to Use Take Profit and Stop Loss
From the technical analysis point of view stop loss and take profit are mostly based on strong support and resistance levels. For trend trading support/resistance levels are trend lines, for flat trading – borders of the channel.
There is a simple logic behind this. A strong level of support or resistance will hardly break and the probability of a rebound from it is high. Therefore, the stop-loss should be set at the level of the previous maximum (minimum) in case of fake breakout. If the level of support (resistance) is broken, then the continuation of the trend, based on which we opened a position, is no longer an issue. At the same time, profit is our forecast for the price to reach the next level (channel boundary).
The same principle of placing stop loss and take-profit is used in all types of trading. You can identify strong support and resistance levels yourself (previous local minimum and maximum) or by using indicators (such as pivot points. moving averages, etc.).
How to calculate Stop Loss and Take Profit levels
The size of a stop-loss is basically the amount that the trader is willing to risk in an open trade. According to money management law, the recommended risk level should be 1-2% of your account balance for any transaction.
For example, if your balance is $10,000, your risk should be 2% maximum. It means in any trade your loss should not more than $200 (2% of $10000).
Then a trader should evaluate the correlation between the size of his stop-loss, the price of one pip and the volume of the position. The trader has calculated that for a position at a given moment stop loss should be located 25 pips from the entry point. The cost of one pip is 200/25 = 8 dollars. Considering that the price of 1 pip is 10 dollars for 1 standard lot size position, the trader gets the recommended position size of 0.8 lot.
Similarly, your trading startegy will define a size of take-profit. For this, a trader should know his trading startegy very well and set the profit target according to his strategy and market situation.
A trader should also take consideration of spreads while placing or calculating stop loss and take-profit.