Mastering the Art of Stop Loss and Take Profit in Forex Trading (2024)

FAQs

How to set stop loss and take profit in forex trading? ›

Certainly, it's recommended to set stop losses. At any point, the limit price could go either up or down, this is the market law. If a trader doesn't use stop losses, they try to ignore this law, hoping for the best. Therefore, the market analysis is not objective, so there won't be any steady profits.

Although there is no general way of structuring your stop loss and take profit orders, most traders try to have a 1:2 risk/reward ratio. For instance, if you are willing to risk 1% of your investment, then you can target a 2% profit per trade.

The stop loss should be placed 15-20 pips above the sell order level. The take profit is 30-40 pips.

What stop-loss percentage should I use? According to research, the most effective stop-loss levels for maximizing returns while limiting losses are between 15% and 20%.

It's not possible to trade without loses at all, but it is possible to minimize the risks.

Stop loss orders execute the trade at the lowest possible price when buying the currency pair and at the highest possible price when selling it. For example, if you go long on EUR/USD and set the stop loss order at 10% below the price at 1.8, your losses will be limited to 10%.

A risk of using a stop-loss order is that it may be triggered by a temporary price fluctuation, causing the investor to sell unnecessarily. For example, if a security's price drops suddenly and then quickly recovers.

One of the most important rules is to trade with the trend: if the market is going up, place a 'buy' trade; and if it's going down, place a 'sell' trade. It's probably not a sensible idea to attempt to pick the top or the base.

Which forex strategy is most profitable? ›

Position Trading Strategy

Unlike day trading, position trading requires you to hold a position for weeks or even years. It is the best forex strategy ever, as traders don't have to deal with short-term price changes. This strategy is best for patient traders.

Most traders say it takes at least six months to a year. Start by learning the fundamentals and comprehending currency pairs, market dynamics, and trading strategies from reliable sources. Before making the switch to live trading, practice on demo accounts for at least three months.

Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.

The 2% rule in investing suggests that you should never risk more than 2% of your capital on any single trade or investment. This approach helps manage risk by limiting potential losses and preserving capital for future opportunities.

The 6% stop-loss rule is another risk management strategy used in trading. It involves setting your stop-loss order at a level where, if the trade moves against you, you would only lose a maximum of 6% of your total trading capital on that particular trade.

You can only place one entire position TP/SL order targeted at one position. If you decide to place both take profit and stop loss at the same time, once one side is triggered, the other side will be canceled. The entire position TP/SL (original TP/SL) applies to a fixed quantity in the position.

A very popular profit-taking strategy, equally applicable to option trading, is the trailing stop strategy wherein a pre-determined percentage level (say 5%) is set for a specific target. For example, assume you buy 10 option contracts at $80 (totaling $800) with $100 as profit target and $70 as a stop-loss.

Adding Stop Loss and Take Profit Levels

The easiest way to add SL/TP levels to your already opened position is by a using trade line on the chart. To do so, simply drag and drop the trade line up or down to specific level. Once you've entered SL/TP levels, the SL/TP lines will appear on the chart.

In the Order window, you can modify your order starting from the order volume (lot size) and setting up Stop Loss or Take Profit. Once you click on the arrows in the S/L and T/P fields, the current price will pop up and you can adjust it from there.