The Stop Orders in Forex
Stop loss and take profit are stop orders that can be used by absolutely all professional and beginner traders. With proper use of these orders, the trade in the currency market can become a passive source of income. Take Profit and Stop Loss relieve the trader from having a permanent presence on the trading terminal. The concepts of stop loss and take profit have a similar mechanism of action, and differ only in the result.
In simple terms, take-profit (TP) is a stop order that determines the price at which the position will be automatically closed with a predetermined profit. It is an established level of profit taking. The TP level can be set both before and after the opening of the position and you can modify it without any restrictions. The main function of this stop order is to help the trader manage the account without being always present at the computer. Once you have set the TP, you can go anywhere you like and do whatever you like because once the price reaches this level, the profit is yours.
Stop-loss is also a stop order, but it is used to limit losses. The purpose of the stop loss (SL) order is the same: to give the trader the possibility to do other activities instead of continually monitoring the price. It is a risk management technique that helps to reduce losses. For example, is you want to sell a currency pair and you are afraid it may go up, which is against your prediction, you can put the stop loss order at some points above the current price, so in case the price goes up, the losses will be automatically stop to increase at the SL level.
Risk Management with SL and TP
When the stop loss is set, the trader should properly assess the combination of technical factors that are reflected in the price chart and remember to protect his deposit. The more volatile the market, the further from the current price level the order must be set. The trader is always interested to set the stop-loss as close as possible to the price, in order to minimize losses. However, when the SL is too close to the price of, it can eliminate many potentially profitable positions because of the short-term price fluctuations.
Each trade must be determined by a ratio of profit and loss. They need to be balanced with each other in case the market moves in the wrong direction. The popular ratio is 3 to 1. For example, if a trader is risking $ 100, the profit potential of the transaction must be at least $ 300. If for various reasons, these proportions cannot be achieved, such a deal is better to avoid.