Trading on the foreign exchange (Forex) market aims to generate profit. However, every trader knows that losses are inevitable. To limit losses and lock in desired profits, MetaTrader 4 terminal offers stop-loss and take-profit orders.
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Take-Profit, or simply ‘take’ in trader jargon, is an order that closes your position when a specified positive value is reached.
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Stop-loss, also known as ‘stop’ or ‘loss’, is the opposite of a take-profit order, closing a position when a specified negative value is reached.
nHow to correctly set stop-loss and take-profit in Forex trading?
" />Using Stop-Loss and Take-Profit – A Disciplined Trader’s Approach
Many traders prefer to trade without stop-loss and take-profit orders, closing positions manually. While each trader has the right to manage their account as they see fit, this approach is considered incorrect by ForTraders.org. The psychological aspects of setting these orders are discussed here. We focus on being disciplined traders who always use both stop-loss and take-profit.
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Several controversial points need clarification.
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Both statements are essentially incorrect. The size of the stop-loss cannot be determined intuitively. It depends on several factors: account size, trading style, the time frame used, and more. For example, a stop-loss of 10-15 pips on a daily chart would likely be taken by the market, while a 100-pip stop-loss during intraday trading could result in a loss greater than one day’s trading results.
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Who said that take-profit cannot be changed? Risking profit is sometimes necessary. The key is not to be greedy.
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Now, we will divide the rules for setting stop-loss and take-profit into technical rules and calculation rules.
Technical Rules for Setting Stop-Loss and Take-Profit
From a technical perspective, the placement of stop-loss and take-profit orders depends on strong support and resistance levels. For trend trading, these levels are trend lines, and for trading in a range, they are the boundaries of the range.
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" /> Placement of stop-loss and take-profit when trading with the trendn
The logic is simple. A strong support or resistance level is unlikely to be broken quickly, and there is a high probability of a bounce. Therefore, the stop-loss is placed beyond such a level, usually at the previous high (low). If the support (resistance) level is broken, then there is no longer a reason to believe in the continuation of the trend on which the trade was opened.
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Take-profit, in turn, is our forecast for the price reaching such a level (channel boundary).
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" /> Placement of stop-loss and take-profit when trading in a rangen
The same principle of placing stop-loss and take-profit orders is used in all types of trading. You can determine strong support and resistance levels yourself (previous local highs and lows) or using technical level indicators.
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When placing stop-loss and take-profit orders, there are several important considerations:
- First, understand that many market participants place stop-losses at important levels. The older the time frame, the stronger the level, and the higher the likelihood of other traders having stop-losses nearby, which increases the chance of your order triggering.
- Avoid placing stop-losses at round numbers like 100, 750, etc. These levels seem to attract most traders psychologically.
Rules for Calculating Stop-Loss and Take-Profit
After defining the technical rules for setting stop-loss and take-profit orders, you can move on to the calculation aspect, recalling money management rules, which should never be ignored.
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In essence, the size of the stop-loss reflects the amount a trader is willing to risk in an open trade. Entering the market ‘all-in,’ the risk is naturally 100%. Ideally, the recommended risk level should be 2-5% of the account for each trade.
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For example, if a trader’s account is $5,000, and they set a maximum risk of 5%, the loss per trade should not exceed $250 (5,000 x 0.05 = 250).
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Next, evaluate the relationship between the stop-loss size, the cost of one pip, and the position size. Suppose the trader calculated that the stop-loss is 50 pips away from the entry point. The cost per pip is $5 (250 / 50 = 5). Considering that one pip in a standard lot is worth $10, the recommended position size is 0.5 lots.
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The above example is optimal and does not consider the psychological factor of greed. Unfortunately, many traders, in pursuit of profit, trade with a full lot with a $1,000 account. Thus, there is no risk management or calculations involved.
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When placing stop-loss and take-profit orders, remember another important detail – the <a title=”Spread” href=”https://fortraders.org/articles_forex/ceny-ask-i-bid-eshhe-odin-klyuch-k-vashej
FAQ
What are stop-loss and take-profit orders?
Stop-loss closes a position when a specified loss is reached, while take-profit closes it when a desired profit is achieved.
How should stop-loss and take-profit be placed?
They should be based on support and resistance levels, trend lines, or range boundaries to manage risk effectively.
Can take-profit orders be changed after placement?
Yes, take-profit orders can be adjusted, but traders should avoid being greedy and should manage risk carefully.
