How to use Stop Loss, Take Profit and Trailing Stop

Since you already know how to buy/sell and make a Profit, you must learn how to use Stop Loss, Take Profit and Trailing stop. These are also part of trade management system that helps you limit your risks and maximize profit. What are they?

How  To Use Stop Loss in Forex

Stop Loss is a feature on a trading platform you can use to tell your Forex Broker when to close your trade. This feature tells the broker to limit losses on an open position or trade. Since it is difficult to sit around and monitor your open positions, this feature could prove to be a haven.

Normally, when you notice that the market has moved against you, your first instinct would be to close your trade to protect your capital. Does this mean you can’t take your eyes off open positions? No, this is where using a Stop-Loss comes in. How much loss are you willing to accept for your trades? Think and then set the price level you want your broker to close the trade should the market move against you.

However, setting a stop loss in Forex can be very tricky. What if the market turns back and moves in your favor? You would have missed a huge opportunity. So, the ultimate importance of a stop-loss is to help you keep the position open until the market turns in your favor. You must identify the best price level to place your stop-loss.

Here is an example of how to place your stop loss in Forex:

If the buy price for EURUSD is 1.1086, and you placed a buy order, set your stop loss below the current price. Count a minimum of 5 pips or more backward, 1.1081. If the exchange rate falls down to 1.1081, it means you have lost 5 pips and since you have placed your stop-loss at this level, your broker will close the trade for you to avoid further losses.

How To Use Take-Profit

Take-Profit is the opposite of Stop Loss in Forex. It helps to control the greed in human nature. Yes, we humans are greedy and don’t know when to stop accumulating money. We always want to get everything at a single opportunity. In Forex, many traders have fallen a victim to greed. They don’t want to pull out when the market is in their favor and the market most times comes crashing back against their current position.

Always know when to pull out of a trade when it is moving in your favor and wait for another opportunity. If your eyes are not fixed on your trade, then use the Take-Profit option. Take-Profit is a tool you can use to tell your broker how much profit you hope to get out of your trade, and when the profit has accumulated to that level, the broker will close the trade; your profit is secured.

If the price of EURUSD is 1.1086, and you placed a buy order, set your Take-Profit above the current price. Count a minimum of 5 pips upward, 1.1091. If the exchange rate rises to 1.1091, the broker will close your trade and keep your Profit of 5pips secured. You can set your Take-Profit at any price level above the current price.

How To Use A Trailing Stop

A trailing stop is a special trade order where you don’t set the stop loss at a single, absolute price level, but instead at a certain amount above or below the current market price depending upon whether the open trade is a buy or sell position. These orders allow you to protect the downside risk on your trade position while locking in your upside profit. 

Once you have set a trailing stop order, it adjusts your stop loss as the price moves. When the price stops moving, the stop loss then remains at the level which it was last dragged to. 

Let’s say you buy 1 standard lot of EURUSD at a price of 1.30560 and set the trailing stop at 100 points (10pips). On the mt4 platform, you will always find the trailing stop in points. One pip is worth 10 points, while 2 pip is 20 points.

In this example, we set a 100 point trailing stop, which is 10pips. The trailing stop loss will only be triggered once the market price moves in your favor by at least the amount as set by you for the trailing. 

The trailing stop will be triggered if the market price moves to 1.30660 or above and it will set the first stop loss at 1.30560. If the market price moves above 1.30660, the trailing stop will be updated to a new stop loss level, which is 10 pips below the current market price. As the price continues to go up to 1.31400 the latest trailing stop loss will be set 10 pips below the price level, which is 1.31300. 

In this case, you have a profit of about 74 pips (1.31300-1.30560) for your trade position. If the market moves against you, it will trigger your stop loss at the last price your trailing stop dragged it to, which was 1.31300. 

A trailing stop allows you to secure your profit at the same time cap your downside risk.