Forex trading is risky. Brokers’ trading platforms come with several features that minimize the risks. These features help the trader cut down or prevent loss of profit or capital during trading.
The risk-limiting features allow you to place an order on your account to exit a winning trade once your profit reaches a certain level. You also get to stop the transaction once they start to go south. These orders are called the Take profit and the stop loss.
They sound easy enough to use but are a little complicated. The trader needs to know where to put these orders. If you place them at the wrong point, it can lead to a loss of funds or opportunities for profit.
We will explain what take profit and stop-loss orders mean. You will learn how they work plus how to use them to control forex trading risks in this short guide.
What is take profit in forex?
Take profit in forex is a pending order that the trader sets when they place a trade. It is an instruction to the broker who executes the order to close the position once the currency pairs’ price reaches a specified point.
For example, let’s assume you place a BUY trade for the USDNZD pair at 1.4432. Then you set a take profit value at 1.4432 (the current price) + 15 pips in your execution order. Your trade will automatically close once the price moves up to 15 pips. The position remains open until the price reaches the specified amount if you set a take profit order. This is why most people use this order together with a stop loss. We will explain that soon.
Take-profit order is applicable for the following situations:
To leave trades active when you can’t be there to monitor them
Let’s assume you open a position in the morning at 8:30 before you set out for work. And you believe the trade will earn a certain amount of profit before you arrive at the office and settle in your desk. Then you place a take profit at the amount you expect it to reach. The trade closes once the price gets to that level.
To close trades on time
Take profit is an effective risk measure for scalpers who conduct trades in minutes and seconds. Every second counts with this trading technique, so the trader has to exit their positions at the appropriate time. Automating the exit process with a take profit order is efficient here.
To help you maintain your risk management policy
Every trader should have a trading style that includes proper risk management. It is easy to go against this policy when you come across a high-yielding trade. You feel tempted to leave the positions open much longer than you planned. This can be risky. Take profit protects your transaction by securing the profit you earned, and it helps you stick to your risk management policy.
Take profit orders in forex trading are usually placed above the SELL price for a BUY trade, and below the BUY price in a SELL position.
How to set a take profit order in Forex
Before setting a take profit, you must have analyzed the trade to predict the price movement.
If you expect the price to fall, click on the SELL button to enter a short trade.
The pop-up box appears, which will have the take profit column. There you input the value that you expect to earn from that trade.
On most platforms, there is a plus + symbol representing profit. The minus sign will be its other symbol and it stands for the stop loss.
Click on the plus sign to increase the value. Tap it and set it at your desired take profit amount. Click on OK to confirm the order, and get on with your day.
Your trade closes automatically, and your profit remains secured if the price reaches the value you set.
How to calculate take profit orders
Before you set a take profit, you need to determine the value that would be reasonable for the order. Remember, we said if you put it at the wrong amount, you could lose funds.
So here’s how to make sure you place it at a good point:
Take profit calculator
Some brokers provide a take profit calculator that helps you with the computing. The calculator determines the value by checking previous take profits and stop-loss points. It computes the percentage of orders that got successfully closed by these orders. Then it presents the trader with a logical value at which to set the take profit order.
For example, in an uptrend market, you believe the price of the USDNZD forex pair would rise from 1.4322 to 1.4342. Your risk to reward ratio is 1:3. That implies you are willing to risk $1 to earn $3. You then set your take profit at 1.4340.
Most traders use technical indicators to predict the price moves before setting a take profit. Others use price action and simply look at past prices on the charts. It all depends on your trading strategy. But as we have mentioned, your take profit value should be below the BUY price if it’s a SELL trade. You should place it above the SELL price if you entered a BUY position.
How do you use a take-profit order in forex?
It is best to include a take profit when placing a trade.
Enter the take profit value in the appropriate field on the order pop-up box. Bear in mind that this order ONLY takes effect when the price of the forex pair reaches the amount specified. That is, your take profit value must be higher than the current price of the currency pairs.
Remember that this order is a pending order. What this means is you can always adjust it before it takes effect. So as you monitor the prices and spot unexpected moves, you can move the take profit up or down, depending on the conditions. Take profit is a risk setting that safeguards your earnings. Therefore your position stays protected if used properly.
How to add take profit to an open position
If you already opened a trade without adding a take profit, you can still do this.
Click on the trade line on your chart and drag it up or down to a certain level. This opens the take profit level.
You can also do this simply on Mt4 by clicking on the TERMINAL bar. Click on MODIFY OR DELETE ORDER to add or edit the take profit on the drop-down menu.
The ORDER box pops up. Then you can edit your positions by adding the take profit or stop loss or change the values.
What is stop loss and take profit in forex?
Stop loss and take profit in forex trading are orders that the trader uses to tell the broker to close a position at a specified time.
Trading platforms come with these orders so that the broker can understand how much funds the trader is willing to risk for a particular trade.
On the other hand, take profit order tells the broker how much profit the trader wishes to make for the transaction.
Both orders usually go together. Note that it is recommended for newbies to use more stop-loss orders than take profit. The reason is that it limits their exposure to market risks while protecting their newly invested capital.
These trading tools are among the most essential. All good brokers should have them and we recommend that new traders learn how to use them thoroughly before increasing their investments.
It seems uncomplicated, but placing a stop loss and take profit requires adequate knowledge of the market and price movements. Experienced traders do a lot of calculations and analysis before placing these orders.
The trader can miss the profits they could have gained if it is placed at the wrong point, or worse, lose part of their capital.
Using stop loss and take profit orders
In most cases, it takes time to learn to use these orders. Because the trader needs to understand how to read technical indicators. It is these indicators that tell you what direction the price would move. It then determines where to place your stop loss and take profit.
As we have mentioned, new traders should start with stop loss orders. This would help them gain advantageous market experience without losing their capital. They may lose some profits along the way since they wouldn’t use a take profit order at this stage. But the experience would be worth it.
Remember that the forex market is highly volatile, and prices change direction without notice. A winning trade can quickly make an unfavorable turn at any moment. This can lead to an unexpectedly large loss if these orders are not already in place.
How to use stop-loss and take-profit orders in forex trading
Using stop-loss and take-profit is not as easy as it appears. The trader needs experience and a good knowledge of technical analysis to use it effectively. This analysis involves looking at the price charts and identifying patterns through calculations. Which helps the trader understand the price movement and predict the coming rise or fall. It is through this knowledge that the trader sets a stop-loss and take-profit at the accurate point.
Traders with little experience usually use the stop-loss more at first. It helps them experience and understands the market while protecting their capital.
They incur some loss in profits earned during these periods. But they gain a lot of knowledge and confidence in the process.
There are 5 ways to use the stop-loss and take-profit. We explain both orders below:
Chart stop is a common approach for setting a stop-loss. It involves studying the price chart to determine the best point to place the order. For instance, let’s say the price of the EURNZD is 1.3210. But you suspect it could rise to 1.3301, though you are not certain. You see other signs in the chart that the price may fall to 1.3195. So you place a stop-loss order at 1.3200. The price falls and you bear the minor loss if the stop-loss value is accurate.
Technical analysis is used here to determine the appropriate stop-loss value. So the trader needs adequate knowledge of it.
Volatility stop-loss or take-profit
Volatility refers to the rate at which the price of the forex pair changes. The candlestick in the chart is often used to determine this volatility. For instance, let’s say the average move of a candlestick in an hour for a forex pair is 15points. It would be logical to set your take-profit within this range for a trade that stays open for an hour.
Fibonacci retracement TP setting
This type of TP setting is based on the belief that the price of an asset always follows a trend. Even though interruptions occur, the price always returns to its original path. The trader then puts a take-profit at the correction level. They open a trade below the correction point after the price has made a reversal. Then place a take-profit order at the area where a new correction begins. This style also requires knowledge and experience in technical analysis.
Take profit based on time-frame
You can set a take-profit order for a specified time. Day traders close all their positions before the end of the trading day. So, in this case, a day trader might set a TP order some 30 minutes before the close of business. If they’re not on seat to sign out of their accounts once it’s time, the positions close, and their funds remain safe. People who trade based on fundamental analysis and news events often use this approach too.
This order involves setting your stop-loss at a percentage of your capital. Let’s say you are trading with $1500. You could decide you’re willing to risk $300 out of this. Therefore, you set your stop-loss at 20%. This is another easy way to place a stop-loss without complex calculations.
You can set a stop-loss and take-profit orders in your account using any of these ways.
The stop-loss order shows the broker the point where the trader wishes to exit the position. So whether they’re close to the account or not, the positions close once the price reaches that point.
Take-profit order also indicates where the trader would like to close their position after making some profit.
The trade stays open and active until the price moves to the stop-loss or take-profit levels. Therefore, no matter the volatility, the account remains protected to a large extent.
Pros and cons of using stop-loss and take profit
Stop-loss and take profit are two very important risk tools in forex trading, but they have some drawbacks. We outline their merits and a few demerits below:
With the stop-loss and take-profit orders, you don’t have to stay glued to your screen to exit positions when necessary. All you need is to determine the points that you wish to close the trade. Then you can get on with your day without worrying about your funds. So if you’re trading multiple assets, these orders become highly beneficial and help you efficiently manage your time.
Prevent mental and emotional distress
Before setting the stop-loss and take-profit orders, you already have some expectations. The emotions are under control because you have analyzed the market. So if there’s a loss, you are able to control and bear with it. With take-profit, your greed is under a tight leash as the trade closes once you take the specified amount.
Gain trading experience with less risk
Stop-loss is an incredible tool that allows novice traders experience the market with some peace of mind. Since the risk is under a bit of control, they can trade with ease, enjoy the experience and learn from it. Stop-loss protects a good portion of the trader’s funds whether they’re there or not.
Requires knowledge and experience
Using take-profit especially requires a good knowledge of the forex market conditions and technical analysis. There are numerous tools, and most of them involve quite complicated mathematics and statistics. It can take months of learning to master some basic technical analysis. So take-profit is not easy to use.
Possibility of missing profits
Take profit secures a portion of your earnings, and close the trade. There are often cases where the transaction could’ve earned much more. Whenever you use this order, there is a possibility that you would miss most of the cash you could’ve earned in that trade.
Take-profit and stop loss orders are essential risk measures for trading the financial market. The foreign exchange market is the most liquid and highly volatile. Therefore, it is recommended that you do not trade the forex market without placing take-profit and stop-loss orders. Every risk management tool is an opportunity to enter the market with peace of mind. And if your emotions are under control, you can make better trading decisions.