Risk management is one of the keys to the long-term success of financial markets. Therefore, stop loss and take profit should be an important part of your trading. This article will help you understand about these tools and how to use them to your advantage.
About Stop Loss and Take Profit
Basically, you, as a trader, notify your broker of stop loss and take profit when you close a trade. The purpose of a stop loss is to tell your broker what risk you are willing to take on a trade. On the contrary, take profit tells your broker how much profit you want to sell and closes when you are satisfied with the value.
Types of Stop Loss and how to use it?
- Percentage Stop
Stop percentage is what it looks like. Instead of telling the server what percentage you want to close with the order, you need to tell the server what percentage of the total you are willing to lose. For example, the trade price is $ 1,000 and you are willing to lose $ 100 on it. Instead of calculating your loss ratio, say that your stop loss is 10%.
The server recognizes you immediately. This is one way to avoid losses when trading at the single exchange rate.
- Chart Stop
Chart stops are the most common stop loss orders. Consider checking your EUR / USD card, the exchange rate is 1.2321, but I think it could go up to 1.2401 per hour, but the stability is unsure as some other signals indicate that it could drop to 1.2296. So you place your stop loss at 1.2300. If the exchange rate falls below this amount, it will almost certainly continue to fall, so it makes sense to use this order to reduce your losses.
- Volatility Stop
Volatility stop refers to asset instability reported by the seller. Volatility refers to the frequency and how much a currency pair can change its price. If this happens on a large number of pips per second, it is considered very unstable or volatile. On the other hand, low volatility exists. You need to figure out the level of volatility that is too high for you and tell the server about your choice.
How to use take profit?
If you make last minute profits, it is very likely that changes will occur and your profitable transactions will suffer huge losses. Take profit is used to avoid this from happening.
Traders measure the maximum growth that can be measured for a particular currency pair on the next day or the next hour and then place profit orders accordingly. When the exchange rate reaches a fixed value, the transaction is completed and the trader can walk away with his or her profit. The way of placing orders for profit in foreign currency is the same as stop loss. It can be a percentage, a chart or volatility, there is no definite difference between the two.