Explaining Take-Profit & Stop-Loss Orders in Forex

Explaining Take-Profit & Stop-Loss Orders in Forex

By Mateo Jarrin Cuvi

Have you met a trader’s best friends, Stop-Loss and Take-Profit, both of them of the limit order family?

If you haven’t, it’s about time you befriend the two, especially the Stop-Loss order, which is there to prevent you from losing way more money than you’re comfortable with from any position you open.

This is the equivalent of your buddy Randy dragging you away from the open bar at the company’s Christmas party after you’ve already consumed three appletinis, feeling your head spin and vision blur.

Jokes aside, here’s a quick overview of each of the orders and how you can use them to protect you from bad trades or help you make the most out of your good ones.

Take-Profit Orders

Simply speaking, a take-profit limit order is one that establishes the precise price at which you want to close out your trade to make a profit. If this price is never reached, then the take-profit limit order does not occur.

Therefore, if the price of the financial instrument you’ve invested in is climbing and reaches the price you’ve set as your trade-profit limit, the trade will be closed, making you some well-deserved money.

Generally, experienced traders will apply take-profit limit orders with stop-loss orders to manage their trades and protect them from either losing their profit or initial investment.

However, Investopedia warns traders that this type of limit order “should not be placed so far from the current trading price that it represents an unrealistic move in the price of the currency pair.”

Altogether, there are a few advantages to setting a take-profit limit order on each and every one of your trades. Keep in mind that take-profit limit orders are particularly helpful for short-term traders; long-term traders tend not to use them as they may close their position too early and take a bite out of their profits.

First, setting a take-profit order gives a trader less of a chance to change their mind, stay in a trade too long and lose money that could have been theirs.

Second, it automates the exit procedure, guaranteeing the trader the profit level they targeted when opening the position. Traders who use trade-profit orders don’t have to be on top of their screen waiting for a certain mark to be reached to cash in.

Stop-Loss Orders

A Stop-Loss order, in a sense, is the opposite of a take-profit order, as it is generally set up to close an unprofitable position and prevent you from losing more money that you’d like.

Every single trader on earth should use stop-loss orders to minimize their losses and live to trade another day.

As explained by Investopedia, generally speaking, stop-loss orders “should be placed at levels that allow for the price to rebound in a profitable direction while still providing protection from excessive loss.”

There are plenty of advantages to using stop-loss orders whenever you trade.

First of all, it won’t cost you a thing, so take it as free protection against the fickle nature of the Forex market.

Second, setting up a stop-loss order allows you to step away from your computer or mobile or tablet and rest assured your position will be closed if the market does not behave as you had expected.

Not all traders are super human. Some of you need to take a break from the Forex market to sleep, eat, take a shower, visit with their friends, family and significant others, play canasta or whatever else your heart fancies. So stop-loss orders come in with the assist since keeping track of one’s trades is not something that can be done every second of the day.

Finally, stop-loss orders prevent you from letting your emotions get in the way of your trades and potentially losing a lot of money. Many traders tend to become emotionally attached with particular trades and will feel [insert emotion of your choice] letting go when there’s a downturn in the dear hope their position improves. Hence, setting up a stop-loss order, to a certain extent, cancels this attachment and could minimize your losses.

How to Set Stop-Loss and Take-Profit Orders on MT4

Now to the hands-on component of this blog post!

How on earth do you set up either of these nonetwo types of orders?

It’s actually rather simple. We’ll show you.

  • Open your MT4 platform.
  • Click on +New Order on the menu at the top. A pop-up box will appear where you can place your trade.
  • Pick the Currency Pair (Symbol) you’d like to trade, as well as the Volume and Type (Market Execution or Pending Order) of your trade.
  • Enter your preferred Stop Loss and Take Profit prices in the dialog box, immediately under the Volume box.
  • In some cases, if you selected Market Execution, the boxes where you input your Stop Loss and Take Profit prices may not be available. You will be able to amend this once you have opened your position.
  • Go to the Trade tab at the bottom of the MT4 platform. Here you will find all of your open trades.
  • Right click on the trade you just placed and select Modify or Delete Order.
  • In the pop-up box, you’ll be able to set your preferred Stop Loss and Take Profit prices. Just remember that the Stop Loss and Take Profit you set must differ from the market prices by at least 30 points.

Now go off and put these tips to good use as you place your trades moving forward!

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*Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

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