How to use a stop loss and a take profit when trading Forex (FX)? You will need some knowledge about these elements of trade management to achieve the desired result. A stop-loss is an order that you send to your broker (FxPro, FxOpen, FXCM, Admiral Markets, eToro, and many others), informing them to minimize the losses on an open position or trade. A take-profit is an order that you send to your broker (FxPro, FxOpen, FXCM, Admiral Markets, eToro, and many others), asking them to close your position. To learn how to use stop-loss and take-profit orders appropriately in Forex, keep reading.
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Placing Stop-Losses in Forex
When you start messing with the stop-loss, you should remember to place it at a logical level. That way, you will be informed about signal absence. There are several tricks to be used to leave a trade in the right way.
- Let the market reach the predefined stop-loss that you placed when you start trading.
- Exit the trade manually, because the price dynamics shows a signal against your position.
The knowledge of how to estimate the stop-loss and take-profit in Forex is crucial. But don’t forget that your exit should be devoid of emotions. For instance, you can leave a trade manually because the market can hit your stop-loss. In this case, you are full of emotions because the market can move against your position.
While your stop-loss placement should be determined by logic, you need some templates to simplify the whole process. Here are some strategies that will minimize the risks of potential losses:
- Pin Bar Trading Strategy Stop-loss Placement: The most logical location to initiate a stop-loss on a pin bar setup is situated between the high or low level of the pin bar tail.
- Inside Bar Trading Strategy Stop-loss Placement: The most logical location to initiate a stop-loss is on an inside bar setup that is situated between the mother bar high or low.
- Counter-trend Price Action Trade Setup Stop-loss Placement: In terms of a counter-trend trade setup, a trade can place the stop-loss just between the high or the low made by the setup that determines a future trend amendment.
- Trade Range Stop Placement: Every trader and investor usually has to deal with a high-probability price action that is formed at the boundary of a particular trading range. That is the case when traders and investors may want to place their stop-loss within the trading range boundary or between the high or low of the setups.
While learning how to use stop-loss and take-profit in the Forex market, you should apply a few strategies to find out the most appropriate option. For instance, if you have a pin bar setup at the top of a trading range, you will place your stop at a higher level. At the same time, it needs to be located outside the resistance of the trading range, not just over the pin bar.
These consolidation timeframes usually encourage the development of large breakouts in the direction of the trend. These breakout trades are quite lucrative for traders and investors. Generally, there are two approaches to stop placement on a breakout trade with the trend. You can make your stop-loss either at the 50% level of the consolidation range or on another side of the price dynamical setup.
Placing Profit Targets
To use stop-loss and take-profit in Forex, you should leave a trade when you have a respectable profit. No matter how strange it may sound to you, you should not wait for the market to turn its back to you. Interestingly, not leaving a trade when things go well is a hard thing to do. Therefore, you can use the stop-loss and the take-profit in Forex in order to take respectable profits or a 1:2 risk/reward ratio.
Understanding the General Profit Target Placement Theory
After finding the most logical placement for a stop-loss, you should focus on gaining a logical profit target placement, as well as a risk/reward ratio. A decent risk for reward ratio is viable on a trade, but it is surely not worth taking. Therefore, you should identify the most logical place for your stop-loss, and then define the most logical place for your take-profit. As soon as the things are done, you should not avoid core market levels or apparent obstacles that are in your way. Also, don’t ignore the correct stop-loss/take-profit ratio. You should analyze the general market terms and conditions, resistance and support rates, the major turning points in the market, as well as other significant elements.
The Bottom Line
Every trade can be viewed as a business deal. Before processing, it needs to be checked in terms of potential risks and bonuses. In Forex, every realistically practical trade can be processed straight away. To optimize the amount of profits, it is a reasonable decision to use stop-loss and take-profit in Forex.