Stop Losses and Take Profit Orders

Forex trading can carry significant risks, and various techniques can be used to minimise and control this.

STOP (STOP LOSS) ORDER:

Stop Loss

A type of order that turns into a market order to buy or sell stock or options when and if a specified "stop" price is reached. Stop orders to buy stock or options specify prices that are above their current market prices. Stop orders to sell stock or options specify prices that are below their current market prices.

A Stop Loss Order is an automatic close of a trade that you can set to happen if your currency goes in a direction that would cause you to lose money. For example, if you sold a currency short with the intention of letting its value decrease and buying it back for a profit, you could set a stop loss order if the currency moved upwards by a certain amount. Additionally, if you bought a currency and it began to fall, your Stop Loss would keep you from losing more than you wanted to by selling the currency automatically.

UFXMarkets gives you the option of setting your own Stop Loss Orders so that you control the value of your trade and can ensure that it doesn't drop below a certain level. This way you can minimize your risk on each investment without constantly monitoring all your trades. It's important to remember that a Stop Loss does not guarantee to execute at your requested rate, though in Normal Market Conditions most Stop Losses are filled at the requested rate. Normal Market Conditions reflect any time in the market when liquidity is high and there are no extraordinary events occurring that increase volatility.

Stop-Loss / Limit Orders

Stop-Loss and Limit orders are protective orders that close an open position or future position under certain conditions, namely price.

Stop-Loss Orders are used to limit trader's losses if the market moves against their position. The trader sets the maximum amount (in terms of pips) that he is willing to lose on a certain trade. When that specified price is reached, the trade is executed.

Conversely, Limit Orders are used to lock in the trader's profit if the market moves favorably. The trader sets in advance the price at which he wants to close his position.

In the example below, a trade was opened at the market price of 1.0561(buying order). According to the stop-loss order, the position will be closed if and when the price falls to 1.0553. According to the take-profit order, the position will be closed if and when the price hits 1.0565.

Entry Stop Orders – Entry stop orders are orders that are being placed by traders to enter the market at a less favorable price than the current price. A BUY Entry Stop order will be placed above the current market price. When A SELL Entry Stop order will be placed below the current market price.

When placing Entry Stop Orders, the trader expects that once the market's momentum breaks through the specified price, the trend's movement is confirmed and will continue in that direction.

For example:

The USD/CAD trades at 1.0553 / 1.0557. You estimate that the USD/CAD will continue trending higher. You also believe that should the pair break above 1.0600, it will rise by at least 50 pips. Thus, you place your BUY entry stop order of 20 lots (100,000) USD/CAD at 1.0600.

Trailing Stop-Loss Orders

A trailing stop-loss order is a stop-loss order that is set by the trader at a fixed number of pips from his entry rate. The stop loss order is automatically moved as the market price moves, but only in the direction of the investor's trade.

For example:

If you're Long on the USD/CAD pair at 1.0552 and you set the trailing stop at 30 pips, the stop will initially become active at 1.0522 (=1.0552-0.030).

If the USD/CAD moves higher to 1.0565, the stop-loss order adjusts higher, pip by pip, with the market price and will then be active at 1.0535 (=1.0565-0.030).

If the USD/CAD ever goes down by 30 pips from 1.0565 to 1.0535, your stop will be triggered and your position closed. If the market goes up from 1.0565, your trailing stop will continue to move up in order to lock in additional profits.

One-Cancels-the-Other Orders (OCO)
OCO orders are combined orders with both a stop price and a limit price. When one of the orders is executed, the other is automatically cancelled. OCO orders can be applied to open positions, or they can be used to open a new position.

Say for example a trader believes that the USD/CAD, currently traded at 1.0548/1.0552, will continue trending higher; you believe that should the pair break above 1.0560, it will rise to at least 50 pips. Nevertheless, you expect that prior to this major incline, the pair will retrace to 1.0544. You can place an entry limit at 1.0544, but in case the pair does not hit 1.0544 before climbing higher, you would miss the trade. You then place an OCO order to buy the USD/CAD if it reaches 1.0544 or 1.0560. Of the two, the first bid price to exist in the market will trigger the order:

Stop and limit orders entered on an existing position are also types of OCO orders. When either the stop or the limit is executed, the other is automatically canceled.

Take Profit

A Take Profit is an automated order you set so that your account will liquidate a particular currency position if it reaches a certain level of profit. This way you ensure yourself a profit. The downside to the Take Profit is that sometimes you get in on the ground floor of an especially profitable trend that continues long after you've exited and you accidentally deprive yourself of an even more profitable trade.

Take Profit orders mean that you are able to take advantage of any profits before the rate falls again and your profit reduces, without constantly monitoring your trades.

Take Profit and Stop Loss Orders are crucial tools in enabling you to professionally manage your trades. Where you set these orders depends on your level of risk, but it is good practice to use them with every trade you make. Management of positions and your investment is key to successful Forex trading.