Stop-loss and take-profit levels are the fundamental concepts that help traders determine their trading strategy and limit threshold risks. SL and TP are well known to professionals who tend to build a line of market behavior based on technical analysis. However, the concepts themselves are familiar to everyone: from beginners to large players in the market. If you are looking for the most important topic when trying to understand how to start trading, start by studying these concepts.
What are SL and TP?
All order types support SL/TP: limit (TP is used for this), market (SL is triggered like a market order), as well as trailing stop and stop.
- Stop loss (SL) is a position price limit set by the trader. As soon as the limit is reached, the position is automatically closed, preventing excessive risk and financial losses.
- Take profit (TP) also allows you to automatically close the position, but only when the price reaches the specified profit target. The automatic closing of the position allows you not to succumb to an emotional impulse, and to fix the profit at a decent indicator.
When setting limits, you should rely not only on potential risks. It is important to take into account the current dynamics and correctly determine the optimal indicators of SL and TP levels so that this contributes to the preservation and growth of the portfolio.
SL and TP Benefits
Predetermined levels for closing positions serve as a disciplining factor. This reduces the emotional component in decision-making when you start trading forex markets and helps to effectively manage financial risks by calculating the ratio of risk and reward. At the same time, these lines help to establish automatic trading, without the need to monitor the market around the clock in real-time.
How to determine the optimal values of the limits?
Traders use different techniques to calculate reasonable SL/TP values. Sometimes they combine different approaches at the same time:
- Determining support and resistance lines;
- Guided by the technical indicator “moving averages” to determine the direction of the trend;
- Taking into account the percentage method.
So, the trader can set the values of “Stop Loss” and “Take Profit” according to such criteria as the price, the goal of maximum profit, or maximum permissible losses, or in the form of a percentage of a certain amount.
Apart from those mentioned above, some other indicators and signals help traders identify the exact data that will serve as technical motivation to close a position. Each time, you have to determine these lines yourself, and this is a great trading habit that can turn any beginner into a successful professional.