Forex Stop Loss and Take Profit

Arguably, the stop loss and take profit orders are the two most important order types for foreign exchange traders. The two orders are essentially orders on top of another order. The stop loss allows you to determine at what price you want to cut your losing trades and the take profit allows you to enter what price you’d like to close a position for a profit.

The Stop Loss

A stop loss should be entered for each and every trade you ever make on the foreign exchange market. A stop loss prevents you from runaway losers, due to the fact that it will automatically close a losing position before your account balance is depleted. It would never be recommended to trade without a stop loss as doing so is like risking your entire account balance on one trade.

If you were to buy a lot of GBP/USD but wished not to lose more than $250 on this single trade, you would set your stop loss 25 pips below the price at which you entered the trade. If you bought GBP/USD at $1.50, you’d want to enter a stop loss at $1.4975, thus preventing a loss greater than $250.

The Trailing Stop

The trailing stop is a different kind of stop loss order offered by a few brokerage accounts. Many investors, particularly momentum traders, like to use trailing stops to both limit their losses, and also to lock in gains. The trailing stop lags the current price by the amount set. For instance, if you were to buy EUR/USD at 1.3150, and wish to lose no more than 50 pips, your trailing stop would sit at 1.3100. If the price were to advance to 1.3175, your trailing stop would then move to 1.3125, lagging the market by the 50 pip differential that you set.

The trailing stop is a more advanced type of stop loss but can be used by any trader. Ultimately, the trailing stop will activate at a price that is X number of pips lower than the price you set. If the EUR/USD was to advance from 1.3150 to 1.3350 without ever dipping more than 50 pips at any given time, you would be in the position all the way to 1.3350. If it had dipped deeper than 50 pips, your stop loss would have been executed.

Take Profits

Take profit orders are the opposite of a stop loss. The take profit is a price at which you would like to close your position for a profit, above or below the current price of the currency. Just like a stop loss, you can enter this order either during your initial entry to buy a currency, or after, and it can be changed at any time.