If you’ve never heard of a Stop Loss or Take Profit order or if you’re not sure how to use them order read on… These tools are essential to trading successfully as they help you exit the market at a predetermined price. Putting in Stop Loss and Take Profit orders should be done for every trade you make to ensure you control the outcome of a position by capping your losses at a price you are comfortable with.
Financial markets can go up and down like a rollercoaster and can fluctuate faster than you could possibly handle manually. Setting up Stop Loss and Take Profit orders means you don’t have to keep such a close eye on your positions, giving you time to manage more positions at once! These tools can close the trade whilst in profit or before they sustain excessive losses. It’s a safety net that a beginner trader can’t refuse.
What are Stop Loss orders?
A Stop Loss is a predetermined level for a trade to be closed to avoid extreme losses. This can be set up when opening a position and adjusted afterwards, if so required, on most trading platforms.
Through analysing the trend and volatility of the asset you are planning to trade and incorporating your personal risk/reward policy, you can decide where to mark the Stop Loss. For a buy order, where you hope the stock price will rise, putting the Stop Loss a little below your entry point will close the position automatically if the position goes down instead of up, preventing a loss. Similarly you can put the Stop Loss a few pips above the current price for a Sell order.
What are Take Profit orders?
Take Profit orders automatically close a trade when a certain profit level has been reached. You might think why do I need a Take Profit order if I have a Stop Loss in place? A Take Profit is essential to lock in profits when markets are moving fast. For example, if the stock falls after a peak within a short time frame, you may be exiting on a Stop Loss and have lost out on profits when just a minute ago you would’ve come away with a profit. A market can move in the opposite direction at any time to it’s best to be prepared and take a profit that is sensible.
Do you always need them?
These orders provide a failsafe protective measure against market volatility. However, you must consider the length you trade. A scalp trader would be foolish not to use Stop Loss and Take Profit orders due to the sharp unpredictability of short trades. Whereas a position trader would benefit from having less conservative Stop Loss and Take Profit orders or none altogether to ride out the fluctuations within the market to achieve a profit long-term. Furthermore, these protective measures take emotions out of the equation giving a logical way to trade that will provide predictability and profit. Using these tools means you don’t need to babysit your positions so closely and then have more time to focus on the bigger picture.
The only negative with using Stop Loss and Take Profit orders is the position could be closed prematurely costing you potential profit, if the market continued to rise or if it was to bounce back from a loss. To maximise profit and keep premature closes to a minimum, carefully consider the support and resistance levels you are relying on and always ensure these are upto date.
So there you have it! Everything you need to know about Stop Loss and Take Profit orders. If you want to learn more we offer a variety of online courses and workshops which you can check out here. Or if you’re ready to give it a go risk free, our app has games, quizzes and much more so you can practice trading without the worry of losing money.