Stop Loss (SL or stops) and Take Profit (TP or target price) are orders meant for the player’s safety. They are, by nature, reverse orders: ex. if a pair was bought, a triggered stop or target price initiates a reverse transaction (selling) thus locking in profits (TP) or losses (SL). Placing orders on transactions should be in accordance with the trader’s strategy.
In stably successful trading these orders are to be used by any means. SL helps minimize losses and manage risks efficiently, as this order is meant for limiting losses. Almost all trading strategies imply placement of Sl and TP.
How to place Stop Loss And Take Profit
Each trader has their own criteria of money management (MM) which help them determine how much they may loss on a transaction; they also have a trading strategy that shows where to place an SL or a TP.
Judging by the above, the process of placement of an SL should be as follows:
- the trader, using MM, figures out how much they are ready to lose on the transaction;
- the strategy tells them where to place a stop;
- a stop is normally calculated in points starting from the entrance to the position, in accordance with the sum of a possible loss in the basic currency of the deposit. The price of a point should be calculated before choosing the basic volume. For example, the stop is 40 pips, an acceptable loss is 100 USD: 100 USD / 40 pips = point price 2.5 USD. Ergo, the volume of the transaction is 0.25 of a lot.
Risk control helps filter signals as well. For example, if there appears a signal with a stop to target price ratio as 1 to 1, a trader should think twice before rushing at the operation. The optimal SL to TP ratio would be 1 to 3 and more, but never less. If the strategy does not imply target price placement, the trader should analyze their instrument visually and figure out the potential of the opening transaction. If there is little chance that the price will cover a distance at least 3 times bigger than the distance before the stop in the necessary direction, such transaction should better be skipped. By no means should a stop be made smaller due to a lack of finance or a desire to enter with a bigger volume because it may lead to a “silly” loss. The price may make a stop and then go in the right direction.
Take Profit is not as widely used as Stop Loss. For example, my trading shows only the direction and very seldom has a concrete goal so long that I am looking for trend reversals on longer time frames. In such cases the position goes in the black. When a position is in the black, a stop is placed under the order to sell or above the order to buy; if the stop is triggered, the position closes with a profit though it was an SL, not a TP that was triggered.
Automatic placement of SL And TP
Nowadays there exists a wide range of software simplifying the work of a trader. Some time ago one had to place SL and TP manually; if a change was necessary, the order had to be upgraded in numerous steps. These days the life has become much easier. It is enough to click on an order with the left key of the mouse, drag it along the chart and drop at the desired price level. Depending on the direction in which the order has been dragged, a stop or a target price will be placed. There even exists an expert adviser that automatically places SL and TP on a newly open order in accordance with the settings. I have also come across an adviser called Auto-MM: it features a short user guide and not only calculates the volume but also places SL and TP automatically.
Regardless of people on the Net saying that “stops are a way down”, it is worth remembering that for pro traders SL and TP are must have. A timely exit from a position using an SL is considered good trading regardless of the loss. So I dare say that wise use of these orders leads to stable trading.