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Take Profit, Stop Loss and the Trailing Stop

When it comes to forex trading, the excitement and emotions involved can often cause traders to focus on entering the market and generating profits, completely overlooking one of the most important aspects of trading ‘Risk Management’.

One of the keys to achieving success in forex trading over the long term is mindful risk management. Often overlooked by both new and experienced traders it can often be the difference between being profitable or not, as a handful of unfavorably managed trades could seriously impact the overall performance of a trading account.

Some of the most effective and yet commonly overlooked risk management tools available to traders are the Take Profit, Stop Loss, and Trailing Stop orders, all of which are available to be easily used in the MT4 platform.

Let’s have a closer look at these three types of orders to understand what they are and how they can be used to help with the overall risk management when trading.

Take profit

A Take Profit also referred to as T/P is a risk management tool that can be set by a Forex Trader at a pre-determined price level. If the Take Profit level is reached, the trade will automatically be closed to lock in any profits generated from the trade.

For example, a trader opening a Buy position expecting that price will continue to rise is able to set a Take Profit order above the current market price. If the Bid price reaches the Take Profit level, the trade will be closed automatically securing any profits made from the trade.

Comparably, a trader opening a Sell position, expecting that price will continue to fall, is able to set a Take Profit order below the current market price. If the Ask price reaches the Take Profit level, the trade will be closed automatically.

A Take Profit orders can be set when placing market or pending orders, additionally, it can be set or adjusted after a trade has been opened. If the platform is closed, Take Profit is stored on the server, thus will remain active until triggered or deleted.

Stop Loss

A Stop Loss also referred to as S/L is a risk management tool that can be set by a Forex Trader at a pre-determined price level. If the Stop Loss level is reached, the trade will automatically be closed limiting losses from that trade.

Stop Loss is therefore a tool that can be used by traders to help manage their risk.

For Example, a Trader opening a Buy position, expecting that price will continue to rise, is able to set a Stop Loss below the current market price. If the Bid price reaches the Stop Loss level, the trade will automatically be closed.

Similarly, a trader opening a Sell position, expecting that price will fall, is able to set a Stop Loss above the current market price. If the Ask price reaches the Stop Loss level, the trade will be closed automatically.

A Stop Loss order can be set when placing market or pending orders, additionally, it can be set or adjusted after a trade has been opened. If the platform is closed, Stop Loss is stored on the server, thus will remain active until triggered or deleted.

Trailing Stop

A Trailing Stop is a form of stop-loss set on the platform that works on both market orders (Buy, Sell) and pending orders (Buy Stop, Buy Limit, Sell Stop, Sell Limit). The Trailing Stop is set at a specified distance in points away from the current market price. Once a trailing stop has been set, provided the market continues to move in a profitable direction, the trailing stop will move the Stop Loss behind with the price, maintaining the same distance in pips selected for the Trailing Stop.

If the market price stops moving in a profitable direction, the trailing stop would keep the stop loss in its most recent position.

If the price were to reverse and reach the stop loss level, the trade would be closed in many cases realizing a profit.

To set a trailing stop, simply right-click on the trade in the terminal window > select trailing stop from the drop-down menu > choose a preset trailing stop or click and create your own using the custom option.

To remove a trailing stop, right-click on the trade in the terminal window > choose trailing stop from the drop-down tab and click on none. As this functionality runs on the platform, if the platform is closed, the trailing stop is removed.

If you have enjoyed this article and want to apply these risk management tools in a risk-free demo account, click here.

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