Learn to use Stop Loss and Take Profit orders


10 min read

The management of Stop-Loss and Take-Profit (SL / TP) is one of the most important concepts of Forex. The profound understanding of the underlying principles and mechanisms is essential for professional FX trading.

Stop-loss is an order that you, as a trader, send to your Forex broker to limit your losses to a particular open position. The Take-profit works the same way, allowing you to lock the profit when a certain price level is reached. SL / TP is therefore used to exit the market. Preferably, in the right way and at the right time. There are different strategies, making decision making more difficult, but also giving the trader additional opportunities.

The SL / TP customization menu is accessible in the upper right corner

Opening of stop-loss orders

What is a stop-loss and why should it be used in trading? By opening a stop-loss order you determine the amount of money you are willing to risk in the case of a given transaction.

The IQ Option trading platform calculates the amount indicated as a percentage of the initial investment.

Cutting losses at the right time is a skill that all traders have to learn sooner or later if they want to achieve a certain degree of success. Professional traders believe it is wise to regulate stop-losses based on market conditions, and not just the amount of money they are willing to sacrifice. Taking technical analysis into consideration can also be practical. And remember, most traders agree: it is essential to know when to exit the operation even before opening the position.

There are three main ways to determine the optimal stop-loss points:

  1. Percent stop. Determine the stop-loss position based on the amount of capital you are willing to risk at any specific time. The stop-loss in this case will depend a lot on the total capital and the amount of money invested. Remember that experts recommend investing no more than 2% of the trading capital in a single operation.
  2. Stop of the chart. This method is more oriented towards technical analysis than others. It appears that support and resistance levels can also help us determine optimal SL / TP points. Setting the stop-loss beyond support / resistance levels is one way to do it. When the market is outside these areas, there is a good chance that the trend will continue to prove against you. It's time to take what's left of your investment.
  3. Stop of volatility. Volatility is something that traders do not want to lose. It can differ significantly from asset to asset, thus producing a huge impact on trading results. Knowing how much a currency pair or a stock can move will greatly contribute to determining the optimal stop-loss points. Volatile assets may require greater risk tolerance and therefore higher stop-loss levels.

Bollinger Bands are an indicator used to estimate market volatility

It may be a good idea to model your SL / TP system, combining different approaches. It should be based on your trading strategy and market conditions.

By using the SL / TP orders, the obligation to wait until the predetermined price level is reached is not accepted. Feel free to close a position if the market shows an unfavorable price action. But, at the same time, do not allow your emotions to interfere. Have you ever noticed how emotional trading can be devastating? The same thing happens when you place a stop-loss order and do not give your trading strategy enough time to prove valid.

The Stop-loss is not simply the exit point, a good stop-loss is set to become a "point of invalidation" of your current trading idea. In other words, it should show that the chosen strategy does not work. Otherwise it might be a good idea to wait.

Opening of take-profit orders

Stop-loss and take-profit work in much the same way, but their levels are determined differently. Stop-loss signals are designed to minimize the costs of an unsuccessful operation, while take-profit orders offer traders the opportunity to lock profit at the peak of the transaction.

Taking profit at the right time is just as important as setting optimal stop-loss signals. The market always fluctuates and what looks like a positive trend can turn into a recession within seconds. Some would say that it is always better to get respectable profits now than to wait and risk losing potential gains. Note that not even letting your earnings grow enough and closing your position prematurely is not a good practice, as it will deny you part of the potential profit. Waiting too long can be equally harmful.

The art of take-profit orders consists in choosing the right moment and closing the operation before the trend is about to reverse. Technical analysis tools can be of great help in determining inversion points. You can choose between Bollinger Bands, the Relative Strength Index or the Directional Mean Index. These are the indicators that work best in managing SL / TP orders.

CSR can help you determine optimal take-profit positions

Some traders recommend using a risk / return ratio of 1: 2. In this case, even if the number of losses is equal to the number of successful operations, it would still be profitable in the long run. Consider the possibility of finding an optimal risk / reward ratio, which satisfies your personal strategy and remembers that there are no universal rules that work for each asset and for every trader.

Things to remember

Keep in mind that SL / TP orders are just another tool in your rich trading portfolio. Trading capabilities are not limited to the correct use of indicators and stop-loss / take-profit orders. Do not let any automated system do business for you. Rather, rely on the system to have more control over your operations and your emotions. It may take some time to learn the basics of SL / TP orders, but once you have finished, you have another unmissable trading expertise.

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This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that these movements or levels may re-appear in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

GENERAL INFORMATION ON RISKS:

CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 73% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.



Source: IQOption blog 2018-12-06 12:24:36


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