What is Stop-Loss and Take-Profit: calculation and use on Forex

Trading on the financial market is associated with high risk due to rapid fluctuations in asset prices. Many traders, unfortunately, do not manage to strictly follow the rules of money management, which they read about in training materials. As a result, trades are often opened for a significant part of the deposit.

Nevertheless, traders usually adhere to risk management by setting Stop-Loss and Take-Profit levels for each trade. These tools are available for free on all trading platforms.

What is Stop-Loss and Take-Profit?

Take-Profit is the level at which a trade is automatically closed, locking in profit. Stop-Loss, on the contrary, is designed to minimize losses by automatically closing a deal when it reaches a specified level.

These tools protect the trader from large losses. However, it should be taken into account that in rare cases slippages may occur, in which it is impossible to close the position at the specified price.

Setting Stop Loss and Take Profit levels

Initially, setting these levels may seem like a simple task. However, to determine the optimal levels, you need to analyze the dynamics of asset prices and take into account many nuances.

Some traders set stop loss and take profit only at the beginning of their career. However, it is important to remember that even with constant monitoring of the chart, the situation can change instantly, turning a profit into a loss.

Stop loss operation

A stop-loss is an order to the broker to close a position when it reaches a certain level. It remains active even without your participation, automatically closing the position if the price goes against you.

There are three main types of stop losses:

  1. Percentage Stop – based on a percentage of the trade amount.
  2. Chart Stop – based on technical analysis.
  3. Volatility Stop – takes into account the volatility of the market.

Take Profit work

Take Profit is an order to the broker to close a deal when a certain profit level is reached. It helps to fix the profit, preventing its loss when the market situation changes.

Calculation of Stop Loss and Take Profit

Traders have access to free online calculators on brokers’ websites to calculate these levels. It is important to determine the size of the potential loss and profit, as well as calculate the change in balance when the price changes by one point.

Calculation example

Suppose you open a position to buy one lot of USDCHF at the price of 1.6815, with the target levels of Take Profit $120 and Stop Loss $60. To calculate the pip value, multiply the lot by the price step and divide by the current rate:

Cost per pip = (100,000 x 0.0001) / 1.6815 = 5.95 USD

By setting take profit at 20 pips from the current price, your profit will be $119. A stop loss of 10 pips from the current price will result in a loss of $59.5.

Setting levels in MetaTrader 4

To set stop loss and take profit:

  1. Open MetaTrader 4.
  2. Click “New Order”.
  3. Select the asset, position volume and execution type.
  4. Enter the Stop Loss and Take Profit values.
  5. After opening a position, go to the “Trade” tab, right-click on the position and select “Modify or Delete Order”.

Conclusion

Stop loss and take profit are key risk management tools. It is important that their setting is in line with your strategy and technical analysis. Even if you are confident in the forecast, it is better to reinsure yourself and protect your deposit.

Emotions can be a trader’s enemy, and using these tools helps to preserve capital in unpredictable situations.