From the area of currency trading, the three terms stop-loss, take-profit, and monitoring stop are frequently used, since they’re the best-known form of stop and limit orders which are used to close a commerce under specific conditions, allowing the dealer to greatly lessen the risk exposure and commerce together with more serenity.
A Couple Initial Assumptions
For explanation purposes, let’s make the following assumptions:
We traveled Long on a standard 100,000 EUR/USD great deal on a USD account, which means purchasing $100,000.
The present EUR/USD Ask price is 1.5000, which means we paid $150,000.
Pip is defined as the minimal variation that could happen in a transaction, which is 0.0001 for both EUR/USD as well as most of the pairs. We can compute the value of a pip for any specific transaction by multiplying 0.0001 from 100,000 and see any minimal variant gives us a gain or a loss of just $10.
Since the Forex market is extremely volatile, we need a means to secure our commerce: fortunately, we could perform this with stop, limitation, and trailing stop orders.
A stop-loss arrangement is a means to protect ourselves at the worst-case scenario. It is based on a stop pending sequence. Setting it in a distance of -20 pips, for instance, means (under the conditions described above) that with this specific transaction we won’t be losing more than $10 × 20 = $200. You’ll find it extremely useful to be able to precisely track the risk exposure of your open trades.
Conversely, a take-profit (based on a limitation pending sequence) is a means to somehow “save” your profits, meaning if you get a particular Bid price, you may automatically sell. If you, for instance, set a TP in a worth of +40 pips, you will know the maximum you can gain from a transaction is 10 × 40 = $400.
Putting a take-profit arrangement is extremely important as it helps you in keeping your commerce objectives clear for all its length and also avoids the (very realistic) possibility that the greed will take over and damage your commerce. If you don’t have a very clear aim in the very beginning, you won’t ever need to close a commerce since you’ll constantly be looking for an increasing number of profits. However, chances are you won’t wish to close it when the set has made its peak and started to retrace, eventually causing one to lose to a potentially positive commerce.
Trailing Stop in Forex
A monitoring stop is an interesting mechanism, very useful, especially in volatile markets. Suppose you trigger a trailing stop to track your gain in a 50 pips distance, and also the set originally goes from 1.5000 into 1.5150, then makes a swing back in 1.4800, as soon as your SL and TP reaches 1.4900 and 1.5200 respectively. What happens?
With no trailing stop, you’d exit the trade in the first stop-loss level at 1.4900, losing $1,000. But using a trailing stop, you’d gain $1,000 because the stop-loss will be transferred to 1.5100 if the price had attained 1.5150. A trailing stop continuously adjusts the stop-loss level as the money price advances in our favor but does not transfer it if the price reverses.
This way, once the pair reaches 1.5100, the new stop-loss level is triggered and somehow “saves” your profits.
As we all hope you understood, using stop-loss, take-profit, and monitoring stops frequently makes a difference between a good and a poor transaction, and learning how to use them profitably is an essential part of your practice as a Forex dealer.