StopLoss and TakeProfit: using protective orders in the market
Profit making by a trader on the market is achieved by applying a simple rule: buy currency cheaper and sell it more expensive. For this purpose the trader gives commands to open and close trading positions sequentially. Opening of a trading position is carried out by a broker (intermediary) by a market order or by execution of a pending order, and closing of a position at the trader's request or by execution of a pending order. stop loss orders (stop losses) and take profit (take the profits).
The main task of profit and stop loss texts
Task of stop loss order - limit possible losses. TakeProfit is an order similar to the StopLoss order, but with the exact opposite, its task is to help the trader to get out of the deal with profit. Placement of TakeProfit and StopLoss orders allows a trader not to be in front of the computer monitor all the time waiting for the trading result. TakeProfit and StopLoss orders will be executed automatically when the price reaches the set level, so after placing them you can quietly turn off your computer and wait for the execution of one of the orders, preferably the TakeProfit order should be executed more often. You can use MetaTrader 4 features to place Stop Loss and Take Profit orders right at the moment of a trade or later modify StopLoss and Take Profit order levels.
StopLoss and TakeProfit as protection of trader's deposit
Setting StopLoss and TakeProfit levels by trader in the market is a purely individual matter in each transaction and depends on how much capital a trader decides to risk in a particular transaction, but there are a number of rules and methods. Here are these rules and methods:
1. Do not set stop loss and take profit at all
This method is very risky and is used if a trader manages a very small share of capital in a deal (less than 2%) and is sure that his intermediary will not allow "slippage" when closing the order. Besides, in such a deal it is necessary to have another Internet line from another provider ready to work in case of failure. In case of a power outage, it is necessary to be able to immediately switch to battery power. If these precautions are not taken care of in such a deal, you can quickly lose a significant part of your deposit. This method is used in very short-term trading tactics, such as scalping (pips).
2. StopLoss level is set fixed
... (for example, by 10-20 pips from the price on short-term trading periods), at the same time, the level of the TakeProfit set twice as much as the StopLoss level. This method does not match market conditions well and often requires adjustment, which is not always possible in a fast moving market.
3. ATR % stop method
Standard ATR indicator is available in MetaTrader 4. Stop Loss width is determined by the percentage of the Average True Range (ATR). ATR is a measure of volatility over a specified time period.
The most common period is 14. A higher ATR indicates a more volatile market, while a lower ATR indicates a less volatile market. A low indicator indicates quiet trading in a small range, while high values indicate intense trading in a wide range. With this method, by placing a stop at a distance of 3 ATR from the highest point of the market since the position was opened, or by placing a stop at a distance of 2.5 ATR from the highest bar close since the position was opened, or by using a percentage of ATR when placing a stop (10% to 100% depending on the period), you ensure that your StopLoss is dynamic and changes accordingly with market conditions.
The trader should react to volatility with wider stops. TakeProfit level here is also usually set twice as much as StopLoss level.
4. Instead of StopLoss put a pending order in the opposite direction,
i.e. when the order "buy" is opened, the role of StopLoss will be performed by the pending order "sell stop", and vice versa, when the deal is "sell" we put "buy stop".
5. Setting StopLoss equal to resistance and support levels
There is a certain sense in placing a stop loss on the breakdown of important support or resistance levels, lines of well-defined graphical triangles, channels, trend lines. If such levels are broken, further price movement against the position is a logical justification for closing the order.
6. Sliding StopLoss
This is a very effective method used by most traders. It allows you to "pull up" StopLoss levels to insure the already earned profit, i.e. the profit is accumulated and protected at the same time. The MetaTrader 4 platform has a function for this purpose TrailingStopwhich allows the trader to attach a trailing StopLoss level to an open position.
After setting a Trailing Stop (for example, for 15 pips), the following happens: MetaTrader does not take any action until the open position generates a profit of 15 pips. After that MetaTrader itself places a StopLoss order at a distance of 15 pips from the current price. After performing the first action, MetaTrader sends a command to change the StopLoss order level to a distance of 15 pips from the current quote every time the distance between it and the old order level exceeds 15 pips. As a result, the StopLoss order is "pulled up" to the current price.
Trailing StopLoss is one of the most effective tools for profit maximization. If TrailingStop is chosen correctly, you will not close before the end of the price movement in your direction, and you will be able to "catch" almost the entire movement. In skillful hands TrailingStop will increase the profitability of trading at least twice.