How To Calculate Stop Loss And Take Profit In Forex

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How To Calculate Stop Loss And Take Profit In Forex – Stop Loss and Take Profit orders act as insurance and are basically reverse orders. For example, if a pair is bought, when a Stop Loss or Take Profit is triggered, a reverse trade (sale) is executed, locking in profit (if TP is activated) or loss (if SL is activated) .

Stop Loss (SL) is a protective order to limit the potential loss of a trader in an open position. It automatically closes trades when a certain level or loss is reached. Stop Loss is placed to limit losses or lock in profits. In the latter case, the order is located in the profitable section.

How To Calculate Stop Loss And Take Profit In Forex

How To Calculate Stop Loss And Take Profit In Forex

Take Profit (TP) is an order to take profit without the intervention of the trader. When the price reaches a certain level, the order automatically closes the trade.

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Both Stop Loss and Take Profit should be set according to the trader’s strategy. These orders are mandatory for your trading to be stable and successful. Stop Loss minimizes losses and improves risk management.

Almost all trading strategies include the use of Stop Loss and/or Take Profit. Every trader has their own money management (MM) criteria that tell them how much to lose on each trade. This is a strategy that tells you where to place SL and TP.

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If something goes wrong, the trader determines how much he can lose according to the MM. The strategy tells them where the Stop Loss should be.

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The trader is using the Pin Bar strategy. A Pin Bar pattern has formed at the top of the bullish momentum and the trader plans to open a sell trade. In this case, Stop Loss is placed behind the maximum value of the signal candlestick. The Take Profit symbol is the nearest support level. In this case, the profit and loss ratio is 3:1. In the first picture you can see where SL and TP should be placed in the trading strategy.

Stop Loss is usually calculated as the sum of potential losses expressed in the deposit’s base currency and calculated in points from the time the trade is entered. The trader must calculate the spot price and then place the volume. For example, the Stop Loss is 40 points and the potential loss is 100 USD; 100 USD/40 pips = 2.25 USD per pip. Therefore, the trading volume is 0.25 lots.

With the help of risk management, the trader can control the risk. For example, if they receive a signal with a 1 to 1 profit/loss ratio, a trader should think twice before entering that trade. The optimal ratio of profit and loss is not less than 3 to 1.

How To Calculate Stop Loss And Take Profit In Forex

In the picture we can see the full Pin Bar and if we consider the trade as a strategy, we can see that the nearest support level is far away from the Stop Loss which gives a 1:1 ratio. So we can filter out this signal as inconsistent with MM.

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In the next example, let’s look at the simplest strategy based on two Moving Averages (MA) and Fractals. A trader receives a sell signal after crossing two MAs; then place a Stop Loss after the trade is opened. The SL target symbol here is maximally fractal (so you can secure trades from false breakouts and moves). The trade should be closed when the MAs cross in the opposite direction. If the intersection is not known at the time of opening a position, the trader must manually move the stop at a certain distance from the price.

If there is any doubt that the price can move in the required direction at least 3 times the distance to the Stop Loss, it is better to skip such a trade. You should never set SL lower than planned because of lack of funds or want to enter more, as this can lead to foolish losses. A trade can be pre-closed before the price moves in the desired direction.

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Trailing Stop is a function that automatically moves the Stop Loss a certain distance behind the price. In the MT4 terminal, this function is activated by clicking the right mouse button. Next, you set the number of points for the Trailing Stop. As the profit in the open position increases, the SL will automatically move. Remember that the terminal must be turned on for Trailing Stop to work properly.

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Unlike Stop Loss, Take Profit is not widely used. In such cases, the position is moved to the broken point. Transfer to positive field means that SL will be placed in positive field and if it is activated, the position will be usefully closed even if we do not use TP.

Currently, there are many programs that make life easier for traders. Previously, Stop Loss and Take Profit had to be placed manually, and if they were to be changed, the trader had to update the order in several steps, but nowadays everything is much easier. Just click the left mouse button on the order on the chart and drag it to the desired price level. SL or TP will be placed depending on the direction in which the order is transferred.

There are scripts and expert advisors that automatically place Stop Loss and Take Profit levels according to set criteria for each new order. On the net, you can find an advisor called Auto-MM with a short user guide, which calculates trading volumes, automatically takes profits and stops losses.

How To Calculate Stop Loss And Take Profit In Forex

Many traders ignore the Stop Loss. When they try to manually close out their losing positions, they begin to sympathize with their trades and hope that the market will turn in their desired direction. As a rule, such actions lead to huge losses and losses. At the same time, a properly placed Stop Loss helps to limit the loss to a reasonable level according to MM.

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Using Take Profit prevents the trader from making more profit in certain situations. The reason for this is that the position is placed at a small distance from the opening level, and the price prevents it from realizing its full potential for movement. In order to use protection orders correctly, a trader should carefully study the strategy and make a decision about the risk of trading before starting to work.

Has been working in Forex since 2009 and trades on the stock market. Regular participation in RoboForex webinars for clients of any level of experience.

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How To Calculate Stop Loss And Take Profit In Forex

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