Traders are constantly on the lookout to make the most profit and minimize risk. One of the best ways they can do this is by taking advantage of the order types. There are many order types, but for the purposes of this article we will just focus on 2. Stop Loss and Take Profit
Among the main advantages of using Stop Loss and Take Profit orders are that they remain dormant until they reach the target price, whether it’s to maximize profit or minimize losses t. The fact that these order types activate when they reach their target price means that traders don’t have to worry about manually executing them.
So, before you jump in and start using these let’s break them down and understand how they work and how to make the most out of them.
What is a Stop Loss Order?
Stop Loss is a type of price limit order. As soon as the set price limit is reached, the open position closes to avoid greater losses. According to Investopedia: “A stop-loss order is placed with a broker to sell when they reach a specific price. These orders help minimize the loss an investor may incur in a security position.”
How to Use Stop-Loss and Take Profit
#ClicktoTweet: To set a Stop-loss in MetaTrader 4 (MT4) go to the “Order” window and select the “Stop-loss” order Level.
For instance, if a trader buys a $50 stock from an X company, he or she can place a stop order for $45 (10% loss), so in a case that the price moves against them, the loss would not exceed that mark, minimizing the risk for a more devastating loss.
Where should I use a Stop Loss Order?
Investors should make it their priority to reduce risk as much as it’s possible, and that’s why the Stop Loss order exists. However, one may have a hard time identifying the right place to set it.
Placing it too far away from the entry point may cause losses greater than what you will handle. Setting it too near may get traders out of the game sooner than they should. The truth is, each person should place the Stop Loss Order to fit the risk threshold established in their trading plan.
What is a Take Profit Order?
Take Profit is also a price limit order, but it works the other way around. As soon as the target price set is reached the open position closes. According to our Tradeview Markets video: “A Take Profit order is a type of limit order that specifies the exact price at which to close out an open position for a profit.”
What to consider when using Stop Loss Order?
According to Investopedia, these are the main things to keep in mind when using this type or order:
- Stop-loss orders are not for active traders.
- Stop-loss orders don’t work well for large blocks of stock, as you may lose more in the long run.
- Brokers charge different fees for different orders, so keep an eye out for how much you’re paying.
- And never assume your stop-loss order has gone through. Always wait for the order confirmation.
#ClicktoTweet: Stop Loss and Take Profit Orders are always connected to an open position or a pending order.
How to Decide When to Set Stop Loss and Take Profit Orders
When setting a Stop Loss or a Take Profit order, traders may make that decision based on a few factors:
- Set according to the Moving Average:
Stop-losses are placed just below a longer-term moving average price rather than shorter-term prices.
- Set by support method
This method may be a little harder to practice. You’ll need to figure out the most recent support level of the stock. As soon as you’ve figured that out, you can place your stop-loss order just below that level.
- Set by Percentage:
Percentage profit or percentage loss target. Instead of making a calculation by value or price, the trader enters the higher percentage he/she is ready to lose.
- Set by Target Maximum:
Maximum profit or loss target. This is set in your trading plan
- Chart Stop or Chart Levels:
It is the most common method to place the Stop Loss order. It’s set based on how much the trader thinks the market would fluctuate. For example, if a trader is seeing a EUR/USD exchange chart and he/she is able to take the risk of a market drop to the 1,221 exchange rate, then the trader would place a Stop Loss order at that point. Mainly because if it drops at that point, it is expected for it to keep falling.
- Volatility Stop:
According to Axicry a volatility stop in the Forex Market “is when a trader indicates how much volatility of an asset is too much for them. Volatility means how often and how much a currency pair may change its price. If it does so every second with quite a lot of pips, then it’s considered to be high volatility.“
Stop Loss / Take Profit in MetaTrader4 (MT4)
The easier way to place a Stop Loss and / or a Take Profit Order is to do it when creating the new order for trading. When a trader is creating an Order in MT4, both options are available in the pop-up window.
The image from xbt.
If the traders want to modify the Stop Loss / Take Profit Orders in modifications in MT4 they need to go to the Terminal Window at the bottom of the screen and right-click the order to edit. Choose Modify or Delete Order. Make the modifications needed.
The image from xbt.
Stop Loss / Take Profit Levels
Traders can establish these levels by using a tradeline on the chart they choose. The only thing the trader needs to do is to drag and drop the line to the level they wish.
The image from xbt.
Can I Cancel the Stop Loss / Take Profit Orders?
The answer to this question is Yes, of course, you can. You can edit, increase, decrease or cancel them as many times as you need, and feel comfortable with them.
Stop Loss and Take Profit are basic orders for trading, and are very useful for most traders out there. For any trader – beginner or experienced – it is vital to know how to use these tools really well in order to get the best out of them. If you want to know even more about Stop Loss & Take Profit Orders, Watch our Simple TradeView Guide:
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