This article will give you an overview of SL and TP in Forex Trading. The article will cover what is SL and TP in Forex Trading, how to place stop-losses & profit targets in Forex and more!
SL and TP are the most significant elements in Forex Trading. Both Stop Loss and Take Profit orders are basically you as a trader telling your broker when to close your trades. Proper use of each component increases the profitability of your trading system as a whole. As a Forex trader, you need to have a deep understanding of these.
What is Stop Loss (SL):
A stop-loss (SL) is a price limit entered by a trader. When the price limit is reached the open position will close to prevent further losses. It’s designed to let your broker know how much you are willing to risk with your trade.
A stop loss is principally used to protect the trade capital by capping losses on active trades. Usually, a stop loss should be set below strong support (long trade) or above a strong resistance (short trade).
What is Take Profit (TP):
A take profit (TP) is pretty much the exact opposite of stop loss (SL). It automatically closes a position once a profit target is reached to lock in profits.
Setting the TP target for a trade is not done randomly. This is the only way to prevent a trade reversal from eroding any profits obtained while the trade is active. To set the TP for your trade, you must factor in the following:
- Location of the nearest support/resistance areas along the direction of your trade.
- The risk-reward ratio (RRR) for the trade.
- The appearance of any reversal patterns.
Advantages of Stop Loss/Take Profit
Most Forex traders can benefit from implementing a stop-loss order. A stop-loss is designed to limit the loss on a security position that makes an unfavorable move. Stop losses allow you to minimize your losses. One key advantage of using a stop-loss order is you don’t need to monitor your holdings daily.
Take Profits to allow traders to maximize profit by exiting a trade as soon as the market is at a favorable price. Take-profit orders are beneficial for short-term traders interested in profiting from a quick bump.
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