Take Profits
This is when investors sell their stocks while prices are rising in order to secure gains. Profit-taking often results in subsequent price decreases for the stock.
Take profit orders are the opposite of a stop loss. The take profit is a price at which you would like to close your position for a profit, above or below the current price of the currency. Just like a stop loss, you can enter this order either during your initial entry to buy a currency, or after, and it can be changed at any time.
The Trailing Stop
The trailing stop is a different kind of stop loss order offered by a few brokerage accounts. Many investors, particularly momentum traders, like to use trailing stops to both limit their losses, and also to lock in gains. The trailing stop lags the current price by the amount set. For instance, if you were to buy EUR/USD at 1.3150, and wish to lose no more than 50 pips, your trailing stop would sit at 1.3100. If the price were to advance to 1.3175, your trailing stop would then move to 1.3125, lagging the market by the 50 pip differential that you set.
The trailing stop is a more advanced type of stop loss but can be used by any trader. Ultimately, the trailing stop will activate at a price that is X number of pips lower than the price you set. If the EUR/USD was to advance from 1.3150 to 1.3350 without ever dipping more than 50 pips at any given time, you would be in the position all the way to 1.3350. If it had dipped deeper than 50 pips, your stop loss would have been executed.
Stop Loss
A Stop Loss is an order to close a trade when the market moves a specified amount against the position.
For example, if a trader longed EURUSD at 1.2500 and was only prepared to lose 15 pips, a stop position would be set at 15 pips below the current market price at 1.2500 - 0.15 = 1.2485.
The purpose of setting up a stop loss order is to put a "safety net" on transactions. Without a stop, a trader could potentially lose all his funds if the trade went against them. A stop position reflects a trader's "pain point," where the market has turned so far against him that he needs to exit his position. As a result, stop orders are useful for money management in controlling losses, helping to ensure a trader is controlling their risk exposure.
There are four methods you can choose from:
- Equity stop
- Chart stop
- Volatility stop
- Time stop
- Margin Stop
1. Equity stop
It's an important money management rule: not to risk more than 2-3% of the total account per trade. According to this rule, a trader would place an order and based on a lot size would calculate amount of pips required to reach the limit of 2-3% of the total account balance (and a stop loss will be placed at that point).
For example: a trader has $1000 USD account, he places a buy order of 4000 units on EUR/USD, which will give him on average $0.40 cents per 1 pip. Since 2% risk that he is willing take equals $20 USD ($1000 * 2%), calculations will be next: $20 / $0.40 cents = 50 pips is the limit for this trade.
2. Chart stop
Used by many traders, this stop relies on different chart patterns, indicators and signals received when analyzing the market. There are many styles & techniques associated with different Forex trading systems. Examples of some of them can be found at TrendLineBook.com and FibonacciBook.com.
There are several approaches to placing protective stops:
- stops based on swings high / low,
- stops using trend lines,
- Fibonacci related stops, etc.
Let's take a look at some examples below-
- stops based on swings high / low,
- stops using trend lines,
- Fibonacci related stops, etc.
Let's take a look at some examples below-
A stop loss based on the last swing low (double-bottom pattern)
3. Volatility stop
Price volatility can also be used when placing a Stop loss order. During active hours & high market volatility, traders should place stops further than usually to avoid seldom price noise and react only to major price changes. During the periods of a low market volatility, protective Stops should be placed closer in order to react in time should the market accelerate.
Let's take a look at the following example:
4. Time stop
Time stops are stops you set based on a predetermined time in a trade. It could be a set time (open limit time of hours, days, weeks, etc.), only trade during specific trading sessions, the market's open or active hours, etc.
For instance, let's say you are an intraday trader and you've just put on a long trade on EUR/CHF and it hasn't gone anywhere. We're talking real snoozeville here!
Why keep your money locked up in this trade when you can use it to take advantage of this one...
Because of your predetermined rules and the fact you do not like to hold trades overnight you have decided to close the position at 4:00 pm, when you're usually done for the day and go off to your bi-weekly StarCraft 2 tournament.
Or maybe you are a swing trader and you decided to close your positions on Friday to avoid gaps and weekend event risk.
Also, having some margin tied up in a dead trade could be costing you an opportunity in another great trade setup somewhere else.
Set a time limit and cut off that dead weight so that money can do what it is meant to do... Make more money!
5. Margin Stop
Time stops are stops you set based on a predetermined time in a trade. It could be a set time (open limit time of hours, days, weeks, etc.), only trade during specific trading sessions, the market's open or active hours, etc.
For instance, let's say you are an intraday trader and you've just put on a long trade on EUR/CHF and it hasn't gone anywhere. We're talking real snoozeville here!
Why keep your money locked up in this trade when you can use it to take advantage of this one...
Because of your predetermined rules and the fact you do not like to hold trades overnight you have decided to close the position at 4:00 pm, when you're usually done for the day and go off to your bi-weekly StarCraft 2 tournament.
Or maybe you are a swing trader and you decided to close your positions on Friday to avoid gaps and weekend event risk.
Also, having some margin tied up in a dead trade could be costing you an opportunity in another great trade setup somewhere else.
Set a time limit and cut off that dead weight so that money can do what it is meant to do... Make more money!
5. Margin Stop
The method is not recommended for novice traders.
It represents a quite interesting approach that would rather suit Forex traders, who like placing all money at once on a particular trade. But at first, a trader should divide his account into several equal parts to ensure that the whole capital will not be blown away in one shot. Supposing that a trader plans to trade $10 000 USD lots, it's suggested that an account opened with a broker "weights" in between $1000 to $2000 USD.
It represents a quite interesting approach that would rather suit Forex traders, who like placing all money at once on a particular trade. But at first, a trader should divide his account into several equal parts to ensure that the whole capital will not be blown away in one shot. Supposing that a trader plans to trade $10 000 USD lots, it's suggested that an account opened with a broker "weights" in between $1000 to $2000 USD.
Then a "play" with a margin starts. Depending on the leverage that is going to be used and carefully choosing a lot size, a trader can calculate the point where a margin call will occur.
This point will work as a global stop loss, which if crossed, will cause the account to be closed automatically.
A predetermined risk, no concerns about the manual stop loss, a maximum trading position size — all that creates the whole new approach to trading Forex.
