Stop loss and take profit orders placed by a trader to automatically close a position. Take profit is set higher than prices (for long positions) the stop loss — below.
As soon as the price reaches the take profit, the transaction is automatically closed with profit. Someone will ask: “Why do you need to fix profit if the price trend goes up? Because you can get profit more and more.” Answer:
- it is not always possible to follow all transactions. If the amount of income is consistent with the desired profit, it is better to close the transaction in automatic mode;
- the psychological moment: “I want more, more, more…” — this behavior is not acceptable for balanced trader. It is important to understand your profits and your losses;
- the faster and higher the price growing, the less willing to make a return on sale (slipping orders).
With a stop loss everything is easier. Setting stop loss is needed in order to minimize your losses. You can monitor the melt of deposit till the end in the hope of price reversal and a position can be closed in cold blood in an automatic mode.
There is no uniform rules for setting stop loss — the length of the “stop” everyone chooses for himself, based on his strategy (by the way, for each strategy, the stop loss length, i.e. the distance from the price trend may be different). But:
- stop-loss should not be too long. Length is determined by the percentage of potential loss to the deposit amount or profit potential;
- stop-loss should not be too short. This can lead to the fact that on the main direction of the trend may occur a rebound (correction), which will close the position on order and again will unfold in the right direction. That is, the length of the stop should be more than a potential correction that is projected by tools of technical analysis.
One of the strategies provides that stop-loss is set below the open position, after rising price trend 50% of profit is fixed at the planned level, the stop loss is tightened to the point of opening the position (breakeven level). This position can be left unchecked for a long time.
Part of the traders believe that the stop loss setting is not necessary because the orders are shoot down by dealing centers deliberately. And therefore more reliable insurance is the locking of the position. And this idea also has the right to life. Because I repeat: to put stop loss or not and if set, at what level, depends on the psychological mood of the trader, his risk appetite and strategy. You may choose the length of the stop can be on a demo account.
Some prefer to set stop losses as close as possible to the entry point, but it is inherent in trend trading. The result — many small losing trades and a few large profitable, pay for the loss. There is another option — set the stop loss, for example, just below the minimum of the last 10 bars. For anti-trend trade it is recommended a fixed stop.
In conclusion, a few words about this interesting order as a trailing stop. If a correct behavior is a gradual hand-pulling stop loss with the price increase (for a long position), the trailing stop creeping the price automatically at a distance known to the trader. It seems to be such an automatic order is a solution to the problems with manual setting of stop-loss, but the problem is that in the case of disconnection of Internet or electricity, the broker sees the order, which is equivalent to its absence. Confident in the reliability of the Internet? Then a trailing stop is a great solution.