Managing risk is more important than just making money in the Forex market. If you don’t know how to manage risk, you’re not going to be able to make good money in Forex trading.
You can’t win 100% of your trades. It’s impossible because the Forex market is always moving and often in irrational ways. For this reason, you need to become a master of managing risk. Besides setting up goals, and developing a trading plan, you also need to protect your trades.
Whenever you enter into a trade, you need to decide how much you’re willing to lose on that particular trade, should it go the wrong way at any point before it is closed.
What is a Stop Loss Order?
A stop loss order is an order dedicated to managing your exposure to risk. A stop loss order will liquidate (close) your position when your losses on that trade reach your predetermined stop loss price. The stop loss price is the price where you have previously decided that your analysis was wrong for this particular trade.
So, before entering any given trade, you have to ask yourself how much you’re willing to lose on that particular trade. This will be your stop loss and is measured in pips.
Whenever you buy a currency pair, your stop loss will be below the current market price. However, whenever you sell a currency pair and go short, your stop loss will be above the current market price.
How to Calculate Stop Loss?
It is fairly easy to quickly calculate your stop loss.
Let’s say that you believe EUR/USD is a good candidate for a buy at 1.2200. Through your technical analysis you determine that the ideal place to hide your protective stop loss is below the support level at 1.2150. You can determine your stop loss by subtracting your SL price from your entry price.
In this case, it’s 50 pips (1.2200 Entry – 1.2150 SL = 50 pips). This 50 pips can be translated into a real financial value that you will lose should your stop loss be hit and your trade liquidated.
Note* The main thing we accomplish with a stop loss order is to minimize our losses.
What is a Take Profit Order?
Deciding when to exit a winning trade is as important as determining when to exit a losing trade. This will determine how profitable you’re going to be in the long run.
A take profit order is used to lock in the profits made on any particular trade. When a set profit has been made in an open position, the take profit order will automatically close the trade once that predefined amount has been reached.
Whenever you buy a currency pair, your take profit is always going to be above the current market price. Inversely, whenever you sell a currency pair, your take profit is always going to be below the current market price.
Tip: You always want to make your profit target bigger than your stop loss.
How to place Stop Loss and Take Profits Orders
Placing a trade on a trading platform is pretty much straightforward. Before a trade goes through you’ll have to setup your stop loss to manage your risk and also to place an order to automatically take profits.
You can also add your stop loss and take profits targets after you place a trade. But it’s just as easy to add them before the trade goes through.
Depending on what type of trading platform you’re using you’ll have different trade tickets. For the purpose of this article, we’re going to highlight how to place stop loss order and take profit orders using MetaTrader4. We have a list of the best MT4 brokers and a guide to setting up MT4 should you need more detail.
Placing your Stop Loss and Take profit orders is quite simple. When you are in the open a new order tab in the MT4 platform, just fill in the appropriate price levels for your Stop Loss and Take Profit targets.