Concept of Take Profit and Stop Loss
Take Profit and Stop Loss are forms of market orders.
TAKE PROFIT
As a trader, you would not always be online monitoring all your trades. It’s not as if Fx traders just get a seat and stay in front of their laptops all day. Some of your trades may stay over the night, some may last for 2 days but you don’t have to keep an eye on them. That’s where market orders come into play.
TAKE PROFIT is a form of market order that tells your broker to close your trade for you and lock in your profit when your trade moves a certain number of Pips in your desired direction even if you are not online. Remember in Forex we are always doing 2 things buying and selling.
Let’s take a scenario when we are buying. Let’s take a currency pair and call it AAA/BBB. It’s currently at $40 and from your Technical or Fundamental Analysis, you found out that it would soon increase in worth. You immediately opened your MT4 and Clicked on BUY and your target profit for this particular trade is just 50 pips because you don’t want to be greedy. Eliminate greed, pick the little you can and move on. Even if you can’t make $100 daily. If it’s only $50 you make daily, a week that’s $50*5= $250 Who pays you $250 a week? You must be working for a reputable company (quick one: most of your lecturers don’t get that much) or doing some weird shit.
$50 is good as a start for a beginner, with time you upgrade to $100 daily – that’s $500 weekly. Back to our example with AAA/BBB whose price is currently at $40 at the point you placed a buy order, and you just need a move of 50 pips, add $50 to $40, your Take Profit would be $90. So when the currency pair starts moving upwards and reaches $90, even if you’re not online, your broker would automatically close the trade for you and credit your trading account with $90. That’s how Take Profit works. Easy peasy.
Let’s Open our MT4, to see where to set our TP and see practical example using real pairs.
Click on the icon pointed at by the Purple circle from any page u are currently on to take you to your charts (any Chart) then click on the icon pointed at by the black circle to take you to another page where you would see where to input in your TP.
The interface is slightly different on Android devices. Having seen where to insert the Take Profit, let’s do some practical examples of how to calculate Take Profit, the Take Profit box is the space to input your TP.
Assuming I want to buy EURUSD at that current *ASK PRICE* of 1.0967 seen in the image above and I want a Take Profit of 30 pips, what I would just do is to add 30 pips to the former value of 1.0967 and I would have 1.0997. So, my TP for that trade would be 1.0997. I would go into that TP box space and type it in and click on BUY. Immediately the currency pair rises during it’s usual fluctuation and gets to 1.0997, my broker would immediately close the trade for me, whether I’m online or not and add my profit to my trading account.
(Notice that I used *Ask price* because I was Buying, during Selling we would use Bid)
Remember in Buying, we are making reference to the Ask price not the Bid price which is why we are making reference to 1.0967 and not 1.0965 (the other price on the left which is the Bid price)
Let’s Focus closely from here onwards, this is where people always get confused and ask questions. In Selling a currency pair at the Forex Market, you are selling after you have found out from your Technical or Fundamental Analysis that the Price would fall.
Let’s Focus closely from here onwards, this is where people always get confused and ask questions.
I hope you remember that.
So as the price is falling, you are making money. This is the opposite of buying. Immediately the price falls from $100 to $55 the broker would add your 45 pips profit to your trading account. That’s the beauty of Forex, you make money both ways. Whether a currency is rising or falling, it’s none of your business. You just enter in the right direction and make your money.
Using practical examples, let’s say after our analysis, we found out that EURUSD would fall. so we decided to Short (Sell) EURUSD pair. Remember now we are interested in the Bid price because we are selling, and the Bid Price is currently at 0.0965 in the image above and I want a TP of 60 pips.
What would be the value of my TP? Here because we are expecting it to fall, our TP would be below not above. So subtracting 60 pips from 0.0965, we have 0.0905. Hence, I would input 0.0905 into the same TP box, we used when we were buying. (Same TP box is used both when you are buying or selling)
So, when EURUSD falls and reaches 0.0905, my broker would automatically close and add my profit for me.
Let’s see another example:
Let’s say that after our analysis, USD weakened because of a bad news and I want to Short (Sell) USDJPY. I only want a TP of 40 pips from that current *Bid price* of 106.33 Take note: Bid price, because we are selling.
What would our TP be? We would just subtract 40 pips from that current Bid price because we are selling. We would input *105.93* into the TP box. When price gets there, our profits would be automatically added to our trading accounts. So immediately price falls to that level, your broker would automatically add your profit for you. In summary we have seen that while buying our TP is up. However, while selling Our TP is below the price.
STOP LOSS
STOP LOSS is another important form of market order, which is like the opposite of the Take Profit order that we talked on earlier. Here, you are giving your broker an instruction to close your trade when the market wants to go against you. Market is always going up and down and sometimes a news may pop up and sway the market in the opposite direction in which your trade was planned, but with a Stop-loss order, immediately the market wants go against you, your broker would close the trade for you through your MT4, even if you are not online.
A stop loss order remains in effect until the position is liquidated or you cancel the stop loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop loss order at 1.2200.
This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss (eww!).
Stop losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop loss order on any open positions so you won’t miss your GNS class or faculty picnic.
Please note that a stop order is NOT guaranteed a specific execution price and in volatile and/or illiquid markets, may execute significantly away from its stop price. Stop orders may be triggered by a sharp move in price that might be temporary. If your stop order is triggered under these circumstances, your trade may exit at an undesirable price. If triggered during a sharp price decline, a SELL stop loss order is more likely to result in an execution well below the stop price. If triggered during a sharp price increase, a BUY stop loss order is more likely to result in an execution well above the stop price.
Now let’s see where to put the Stop-loss order in our MT4.
In the image above, you’d find a field for Stop Loss Let’s say we want to buy a currency pair named AAA/BBB and the price is currently at $40. We want a TP of 50 pips (So we would set our TP at $90, we saw this part earlier). Now after setting our TP, we would also tell the broker look, we are buying, we want our trade to be open only when the price is going up. If the price tries to go down by let’s say more than 10 pips, close trade for us ASAP. So we only want to stay in the trade when the price is going up. We gave the broker a Stop Loss order of 10 pips.
Remember the initial price was $40, for a Stop-loss of 10 pips, we should set it at $30. So anytime the price reverses and starts falling without our knowledge, if it gets to $30, our trade will close preventing further losses even if we are not online. Technology of MT4 has made Forex so interesting, you control how much you earn and also how much you’re comfortable losing in case market reverses.
Let’s see some real examples now:
Let’s say I want to Buy USDJPY at that Ask Price of 106.35. I want a TP of 40 pips and I don’t want to lose more than 5 pips. What would be my TP and SL?
My TP would be at 106.75 (i.e. after adding 40 pips to the current price) And my SL would be at 106.30 (after Subtracting 5 pips from the current price) I would now type in both into the TP and SL Box respectively.
Remember in Selling, you are only making money when the price is falling. While buying your TP is above (because you want the price to go up), while your Stop Loss is below (because if it starts going down, that’s against your trade plan).
IN REVERSE While selling, your TP is below (because you want the price to fall) while your stop loss should be above (because if it starts going up, that’s not your trade plan again).
It’s been a long ride and I do hope I’ve been able to demystify the concept of take profit and stop loss for you.