How To Determine Stop Loss And Take Profit

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How To Determine Stop Loss And Take Profit – Stop Loss and Take Profit orders act as insurance, essentially being reverse orders. For example, if a pair was bought, when a Stop Loss or Take Profit is triggered, a reverse trade (sale) is made, a profit lock (if TP is triggered) or a Loss (if SL is triggered) .

Stop Loss (SL) is a protective order that limits the trader’s losses on an open position. It automatically closes the trade when the loss reaches a certain level or amount. Stop Losses are placed to limit losses or block profits. In the latter case the order is placed in the profitable area.

How To Determine Stop Loss And Take Profit

How To Determine Stop Loss And Take Profit

Take Profit (TP) is an order that locks in profits without the trader’s participation. The order automatically closes the trade when the price reaches a certain level.

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Stop Loss and Take Profit should be placed according to the trader’s strategy. For your trading to be stable and successful, these orders are mandatory. Stop Loss minimizes losses and improves risk management.

Almost all trading strategies include the use of a Stop Loss and/or Take Profit. Each trader has their own Money Management Criteria (MMC) that tell them how much they can lose on each trade. It is a strategy that tells where to put a SL and a TP.

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The trader determines how much they stand to lose, based on MM, if something goes wrong. The strategy tells them where the Stop Loss should be.

Trailing Stop/stop Loss Combo Leads To Winning Trades

The trader is using the Pin Bar strategy. At the top of an uptrend, a Pin Bar pattern is formed, and the trader plans to open a sell trade. In this case, a Stop Loss will be placed behind the maximum value of the signal candle. The landmark of a Take Profit is the nearest support level. In this case the possible profit-loss ratio is 3:1. In the first image, you can see where SL and TP should be placed according to the trading strategy.

The Stop Loss is usually calculated in points starting from the trade entry, taking into account the sum of the losses at the affordable price, expressed in the base currency of the deposit. The trader must calculate the price of a point and then place the volume. For example, the Stop Loss is 40 pips, the available loss is 100 USD; 100 USD/40 pips = price of one point is 2.25 USD. So the trade size is 0.25 lots.

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

How To Determine Stop Loss And Take Profit

In the picture, we can see a whole Pin Bar, and if we calculate according to the trading strategy, we will see that the nearest support level is as far as the Stop Loss, which gives a 1:1 ratio. So we can filter that signal because it doesn’t meet the MM.

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For the next example, let’s take the simplest strategy based on two Moving Averages (MA) and Fractals. The trader receives a sell signal after the two MAs cross; then, after opening the trade, a Stop Loss is placed. The SL target landmark here is the maximum fractal (so you can ensure the trade from breakouts and false moves). The trade should be closed when the MAs cross in the opposite direction. While the place of the crossing is unknown at the time of opening the position, the trader must move the Stop Loss manually, keeping it at a certain distance from the price.

If there is any doubt that the price will be able to go at least 3 times further than the distance to the Stop Loss, it is better to skip that trade. You should never set an SL lower than planned because of lack of funds or because you want to enter with higher volume, as this can lead to stupid losses. The trade can be closed early, before the price moves in the required direction.

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Trailing Stop is a function that automatically moves the Stop Loss after the price to a certain distance from it. In the MT4 terminal, this function is activated by right-clicking. Then you set the number of points for the Trailing Stop. As the profit in the open position grows, the SL will automatically move. Remember that the terminal must be switched on for proper operation of the Trailing Stop.

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Compared to Stop Loss, Take Profit is less widely used. In such cases, the position is transferred to the suspension. Moving to the stop means placing the SL in the positive zone, and if it is triggered, the position is closed with profit, even though we did not use TP.

Today, there are many programs to make life easier for traders. While previously Stop Loss and Take Profit were set manually, and if they changed, the trader had to modernize the order in several steps, today things are much easier. It is enough to left-click on the order in the table and drag it to the desired price level. Depending on the direction the order moved, a SL or TP will be placed.

There are scripts and expert advisors that automatically set Stop Loss and Take Profit levels according to the criteria set for each new order. Online, you can find an advisor called Auto-MM with a short user guide that calculates trading volume and sets Take Profit and Stop Loss automatically.

How To Determine Stop Loss And Take Profit

Many traders ignore the Stop Loss. They try to manually close the losing position, start feeling the mercy of the trade and hope that the market will move back in the desired direction. In general, such actions lead to significant losses and restrictions. Meanwhile, a properly placed Stop Loss helps limit losses to the level that is affordable by MM.

Did They Remove Stop Loss/take Profit Option When Placing An Order?

Using Take Profit prevents the trader from making more profit in some cases. The reason for this is that the position is located at a short distance from the level at which it was opened and prevents the price from realizing its full potential of movement. In order to use protection orders correctly, the trader should carefully analyze his strategy and decide on the risks of the trade before starting work.

He has been in Forex since 2009, he also trades in the stock market. He regularly participates in RoboForex webinars for clients of any experience level.

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How To Determine Stop Loss And Take Profit

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