It often happens that novice traders ignore the recommendation to set a Stop Loss in every trade. The understanding that this is a big mistake comes after several serious losses. Today we will look at what Stop Loss and Take Profit is and how to use them. So, let’s start.
What Are the Stop Loss and Take Profit?
Before the advent of the PC, exchange trading required constantly monitoring a deal and being able to quickly close a deal if something went wrong. After the mass appearance of desktop computers, it became possible to set Stop Loss and Take Profit on Forex thanks to professional broker’s software like https://th.nordfx.com/. Let’s start with the definitions.
- Stop-loss (SL) — is an order to the broker to close the current position when the specified loss value is reached. In other words, if the market has gone in the wrong direction, you can be sure that losses will not lead to a complete loss of the deposit.
- Take profit (TP) is a reverse pending order when the position will be closed at the current profit level. Automatically fixed income is especially important for scalping strategies, where the required momentum can last for several minutes or even seconds. It is impossible to close the order manually in such a short period.
SL and TP — are the main elements of a risk management system. Automatic fixation allows you to fully focus on planning a future deal, work simultaneously on several trading assets, and use advisors.
How to Set Take Profit and Stop Loss?
There are no strict methods here: the main thing is to follow the basic principle by which stop loss and take profit are calculated. However, there are a couple of points that are important when there is no constant control of the trading terminal:
- Strong support/resistance levels and key points of chart patterns give the maximum profit, but it is better to close slightly lower. Do not forget that they are also seen by other traders.
- Check the broker’s rules for automatic take profit closing.
- Stop loss and take profit are best placed at levels where the confluence is observed. For example, when Fibonacci, Pivot Points and Ichimoku indicators are located close to each other.
The trailing stop tool, included in the basic set of all popular trading platforms, will help to make SL and TP dynamically changeable depending on the development of the current market situation. If the trade develops in a positive direction, it starts to move TP/SL on the specified number of points. Thus, we get a double benefit: while taking more and more profits in automatic mode, we reduce potential losses up to the breakeven state, which guarantees to leave the trader with a profit.
Each trading strategy contains its own rules on how to calculate stop loss and take profit. For scalping, it is not recommended neglecting them. So, take your time to learn as much as possible on the topic and good luck!