How to set a stop-loss and take-profit correctly? Technical aspects
The purpose of trading on the currency market is, of course, to make a profit. At the same time, any trader will tell you that trading without losses does not happen. In order to limit your losses and fix the desired profit in time, the MetaTrader 4 terminal implements stop-loss and take-profit orders.
Take ProfitIn the traders' jargon, a take is an order to close your position when it reaches a positive value specified by the trader.
Stop Loss, aka stop, aka moose is a reverse Take Profit order that closes the position when the negative value specified by the trader is reached.
How to set a stop-loss and take-profit in trading on?
Using Stop Loss and Take Profit - the approach of a competent trader
There are many traders who prefer to trade without stop-losses and take-profits, closing open positions manually. Of course, everyone has the right to manage their deposit as they want, but according to ForTrader.org magazine, this approach is erroneous. This topic is quite vast, more on the psychological aspects of setting stop-loss and take-profit orders can be found in here. We are disciplined traders who always set both stop-loss and take-profit.
Let us immediately stipulate a few controversial points.
For example, a quote from one training article: "Along with many general characteristics, the work with the take profit parameter has its own peculiarities that can affect the trader negatively in case of ignorance or non-compliance with simple rules. The essence is that once a certain take profit parameter is set, it cannot be changed"..
Another quote, already from one of the forums: "Due to the instability of the market and frequent jumps up and down, my positions were repeatedly closed by a stop loss, after which the price moved in the right direction again. That is why I set a stop loss of 100 pips for myself"..
Both the first and second statements are, in fact, erroneous. The size of a stop loss cannot be determined intuitively. It depends on many factors: the size of the deposit, the type of trading, the type of timeframe and so on. For example, when trading on the daily chart a 10-15 point stop-loss will simply be "eaten" by the market, and when trading intraday a 100 point stop-loss will bring the trader a loss, overlapping the trading results for more than one day.
And who says you can't change the take profit? Profit can and should be risked. The main thing here is not to be greedy.
Now let's conditionally divide the rules for setting stop-loss and take-profit into technical and calculation rules.
Technical rules of setting stop-loss and take-profit
From a technical point of view, setting stop-loss and take-profit depends on strong support and resistance levels. For trend trading these levels are trend lines, for trading in Flat - his boundaries.
The logic is simple. The price is unlikely to break through a strong support or resistance level and there is a high probability of a bounce from it. Therefore a stop-loss is placed behind such level, as a rule, at the level of the previous maximum (minimum). If the support (resistance) level is broken, then the continuation of the trend, in the calculation of which we opened the trade, of course, is out of the question.
Take Profit, in turn, is our forecast when the price reaches that level (the channel boundary).
The same principle of placing stop-loss and take-profit orders is used in all types of trading. Strong support and resistance levels can be determined independently (previous local minimums and maximums) or by using technical indicators of levels.
There are several important points when setting stop-loss and take-profit;
- First of all, you need to understand that stop-losses behind important levels are set by many market participants. The older the timeframe, the stronger the level, and the greater the probability of accumulation of other traders' stop-losses near it, which, naturally, increases the probability of your order triggering.
- You should not place a stop loss at "round" levels - 100, 750, and so on. For some reason, these levels psychologically attract most traders.
Rules for calculating stop-loss and take-profit
Having decided on the technical rules of setting stop-loss and take-profit orders, we can move on to the calculation component, remembering rules of maneuveringIt is strongly advised not to forget them.
Essentially, the size of the stop-loss is a reflection of the amount the trader is willing to risk in an open trade. Entering the market, as traders say, "for the whole cut," the risk, of course, is 100%. Ideally, the recommended risk level should be 2-5% of the deposit for each trade.
For example, the trader's deposit is 5000 dollars. The trader has set for himself the maximum amount of risk 5%. Accordingly, the loss on the transaction should not exceed 5000 x 0.05 = $250.
Next, we should evaluate the relationship between the size of the stop-loss, the price of one point and the volume of the position. The trader has calculated that when opening a position at a given point, the stop-loss will be located 50 points from the entry point. The value of one point will be $250:50 = $5. Given that the position size of 1 standard lot, the price of 1 pip is $10, we obtain the recommended position volume of 0.5 lots.
The above example is optimal and does not take into account such a psychological factor as greed. Unfortunately, many traders, in the pursuit of profit, trade the whole lot at a deposit of $ 1000. Consequently, there is no risk management and calculations whatsoever.
When placing stop-loss and take-profit orders, remember one more very important detail. spread.
For example, we opened a long position in the EUR/USD pair with a stop loss of 1.1150 and take profit of 1.1230. The spread is 2 pips. Correspondingly, a Take Profit is triggered when the price reaches 1.1232, and a Stop Loss is triggered when the price reaches 1.1152.
This example is for a fixed spread. For accounts with floating spreads, things are a bit more complicated, because during the release of important economic data or fundamental events, the size of the floating spread can increase several times.
It is very common to see statements that the use of stop-loss and take-profit in trading is not necessary. Nevertheless, professional traders open transactions using these orders. Setting stop-loss and take-profit orders correctly is the key to managing your risks and stable profits in trading.