Definicion forex stop loss and take profit
And, even more importantly, the broker was covered. There was no market. The next thing the brokers did was to go after their clients.
The retail traders were forced to come up with the difference. It turned out it was a smart move. A client lost meant no more future revenues. But, not all brokers did that. The retail traders that needed to cover the losses faced a tough reality. Why should traders still use Forex stop loss orders? The answer comes from the unprecedented of the situation.
As such, embracing losses is part of the process. This is a problem for retail traders. When coming to the Forex market, retail traders have unrealistic expectations. I mean, they all go through the same process. Firstly, they look for the perfect trade. That is the trade that repeats on and on. Moreover, the trade that always wins. After spending a lot of time and money to find it, traders move to the next step.
They combine all possible technical indicators in search of the holy grail. The way to do that is to incorporate the Forex losses in a money management system. Believe it or not, when the market hits a stop loss order, good things happen too. Free margin means new opportunities. Traders have margin now for other trades. A door closed, another one opened. Before thinking of the reward, traders must define the risk. Managing the risk is crucial.
And, to do that, risk-reward ratios help. A risk-reward ratio represents the key to profitable trading. It incorporates a Forex stop loss as part of the trading strategy. Moreover, it gives traders control over the trading process. When both the risk and the reward are well defined, traders can focus on finding the best trades possible.
As such, a stop loss order brings discipline in a trading account. A proper risk-reward ratio for the Forex market is somewhere between 1: It means that for every pip risked, the expected reward is double or even more. Every trader experienced Forex failure stories. In fact, it is part of the trading process. However, the reason for a Forex failure goes hand in hand with a bad stop loss order. Or, even worse, with no use of a Forex stop loss.
There are many examples in the retail trading world that show why a Forex stop loss helps a trading account. Now see how a Stop Loss order can protect your Forex trade. Below you will find a video example of a channel trade which does not go as planned. The price was bouncing off the lower level of a bullish channel and I thought a new bullish impulse is on its way. However, the price broke the lower level of the channel and hit my Stop.
The decrease was even sharper, meaning that the Stop Loss protected me from a bigger danger. Because a stop loss order is part of a money management system, its presence is mandatory. As a rule of thumb, traders should always have a stop loss order in place.
But, not everyone uses them. When the broker is a market maker, it does such nasty things. Statistically, they have better chances to make a profit. The stop loss order definition is straightforward. It stops the loss. Or, in plain English: Yet, it is difficult to pull the plug. Especially when a trade unfolds. As such, the better way is to have a plan in mind.
The Elliott Waves Theory is, perhaps, the most complex logical process in technical analysis. Traders count waves as part of identifying the right market cycle.
As such, they divide the market moves in impulsive and corrective waves. The rules defined by Elliott allow placing a stop loss order. In other words, the level that invalidates a count is where the stop loss order should be. According to Elliott, an impulsive wave is a five-wave structure. If the move that followed Mr. The start of the 1 st wave represents the stop loss order level. If the trade is part of a money management system with 1: Simply count the pips needed for the stop, then multiply the outcome with two or two and a half.
As such, traders find the right target. This is the most simplistic example possible. The Elliott Waves Theory is so complex and has so many rules that allow for tighter stops. In fact, Elliott traders have a problem. Yet, the theory gives great trading opportunities. For this reason, it is one of the most popular technical analysis trading theories. Every trader in the world knows that.
From those two points, traders project future support and resistance levels. These levels give the stop loss order for a trade. A stop loss may be the invalidation of a count. Or, in this case, the break of a trendline. Therefore, when the trend line gets broken, the bullish trend ceases to exist.
Moreover, it means such a break represents the stop loss order. The natural tendency is to assume that the account takes a loss when a stop loss order gets hit.
A Forex stop loss may protect profits. If this happens, the emotional factor disappears. Perhaps the most popular way to use a stop loss order is to trail it. Especially when trading on the bigger time frames. In general, one rule applies to the stop loss. Stop loss is what protects you from massive loss and erasing of your account. S o never trade without stop loss, always have it in place! We can only skip the stop loss it if we trade the long-term trends over months and years and we do not use leverage, but that involves minimum traders.
We are getting to the more pleasant part. Like stop loss, the profit target varies by market, strategy, and also by a trader. It does not apply that PT should be larger than SL. We should also try to place a profit target in the logical zone, for example, if the market is in uptrend and in correction, we should place PT at the last high level. Or, we can place PT at a higher level and speculate for a longer period of decline.
The rules are basically similar to the SL, but with the difference that PT does not necessarily have to be set in the market, we can act differently — according to the state of the market, the indicator, for a certain time … There are many options.
Your email address will not be published. Enter your e-mail to register to the free course: Register If you have account already, Log in here first. This is best illustrated by the following figure: Use of the profit target in practice We are getting to the more pleasant part.
In the next article we will talk about leverage.