Understanding Stop Loss, Take Profit and Trailing Stop Orders in Forex Trading

Michael Fasogbon

Updated: 2 December 2023

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A plethora of folks get into the market to gather profits, which are only a click of the button away. Unfortunately, accumulating profits is not a walk in the park as the market movements are unpredictable.

However, with such unpredictable market movements, traders still can get their profits thanks to the stop-loss; take profit, and trailing stop orders.

The three-stop and limit orders are used by traders to close a trade under given condition and hence protect against severe losses in the forex market.

Interestingly, as much as they’re crucial aspects for a forex trader, the majority of the traders are unaware of them and the significance in forex trading.

The forex market is highly volatile, and they’re the aspects that protect the trades. Therefore you’re in the right place and well placed to learn about these significant aspects of orders in forex trading.

What’s a Stop Loss?

This is basically a function that’s offered by brokers to limit the losses in the volatile markets that move in a different direction to an initial trade. It’s achieved by setting up a stop loss level, a particular amount of pips from the entry price.

A stop loss is crucial due to the fact that the future is hidden. Regardless of the strength of a setup, or the length of information at hand pointing a similar direction, the future prices in forex are unknown; therefore, each trade is only a risk.

A stop-loss prevents additional losses such that when in a long position, it becomes a sell stop order, and when in a short position, it’s a buy stop order.

It remains active until that moment when the position is liquidated, or the trader cancels the stop-loss order.

For instance, if you buy EUR/USD at 1.2230, limiting the maximum loss, you can set an ST at 1.2200, meaning if it goes wrong and drops to 1.2200, the trading platform automatically executes the sell order at 1.2200 closing the position for a 30-pip loss.

Take-Profit Order

Just like you have to protect and limit your losses, you also need to “protect” your profits.

It’s an order that closes a trade once it gets to a particular level of profit. When the take profit is reached on your trade, the trade closes at the current market value.

It’s one of the ways to help any trader to stay on track to gather profits. Without a take profit, sometimes greed may take the better of any trader and take time waiting for more profits.

Everybody wants profits, and without a vivid objective from the start, even after a pair hitting the peak, one can be compelled to wait, leading to a loss eventually.

Trailing Stop

A trailing stop is merely a kind of stop-loss order which combines both trade management and risk management elements.

Trailing stops can as well be referred to as profit protecting stops as they help a trader to lock in the profits on trades and, at the same time, cap the amount to be lost in case the trade doesn’t work.

The trailing stop is essential more so in the volatile markets. For instance, if, for example, say you short USD/JPY at 90.80, having a trailing stop of 20 pips, it means that at the start, the stop loss is 91.00. Now, when the price drops to 90.60, the trailing stop would then move to 90.80.

However, the stop will maintain the new price level and won’t widen if the market moves higher against you.

Therefore, with 20 pips trailing stop, when the USD/JPY hits 90.40, the stop would move to 90.60, or simply lock in the 20 pips profit.

The trade remains open so long as the price doesn’t move against the trader by 20 pips, and once the market price reaches the trailing price, a market order is sent closing the position at the best price.

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Conclusion

The forex market can be profitable but only with the right strategies and tools. Using stop-loss, take-profit, and trailing stops is the difference in becoming successful in the forex market.

Therefore, as a trader, you must learn and understand how to use them efficiently.

Understanding Stop Loss, Take Profit and Trailing Stop Orders in Forex Trading

Michael Fasogbon

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