Risk management techniques like stop-loss orders, take-profit limit, position, or lot size play a crucial role in minimizing losses in the Forex market. A trader should always place a stop-loss order and take-profit limit when entering a trade. A stop-loss order and a take-profit limit are considered the two of the most important factors that can control losses during a negative market movement. Stop-loss and take-profit limits can help you manage your trade during an open position, and professionals recommend using a stop-loss limit to reduce financial losses.
What are the stop-loss and take-profit limits?
Stop-loss and take-profit limits are set based on the movement of the graph and the psychology of a trader. Every trader should think and place a stop-loss order at a reasonable level (not near the entry position or not too far away from it). This limit can quickly minimize losses. For instance, if the market value of a currency crosses or exceeds the predetermined value of the stop-loss limit, then the trade will be closed automatically.
Take-profit order works in a similar way to the stop-loss order. A stop-loss order will close the trade when there is a negative movement, and the price exceeds a predetermined value. But the take-profit closes the trade when there is a positive movement, and the price crosses the previously fixed take-profit value.
How to place stop-loss orders in Forex trading
- Market orders
Market orders mean that the stop-loss will take the price that is available once the value reaches the fixed level. If nobody wants to take the currency at that price, then the traders in Hong Kong may face a worse price than he anticipated. This kind of situation is also called slippage. When you are trading futures, you might face heavy slippage unless you choose a great broker like Saxo. So be careful when selecting a broker.
- Limit orders
This is called a stop-loss limit order set by the broker to end the trade when it reaches a fixed stop-loss position. It is not like the stop-loss market order because that will close the deal at an unpredictable price, and even you won’t know that price. This type of order doesn’t have a slippage problem, but investors may face a greater challenge. Limit orders don’t get a trader out of the trades when the price moves too aggressively against them.
Where should you place a stop-loss order (when buying)?
No Forex trader should set the limit at any level because it will determine the losses or the profit potential. Set the limit so that the value will show some fluctuations, but you can still get limit the losses if the market moves against you.
Professionals suggest using a simple method to place an order – always puts the limit below the swing low, which occurs when the market falls and bounces again. It is considered the support level of that point, and in this case, the investor is trading with the trend.
Where should you place a stop-loss order (when selling)?
While selling a currency, no traders should set the limit at any point because the market is always uncertain. Give the chart a room so that it can fluctuate. Don’t forget to protect your investment in this period.
Selling is the opposite of buying; therefore, you need to act differently in this scenario. Set the limit above the swing high. Swing low will help an investor find the support level, while the swing high will aid in finding the resistance level, at which a trader can sell the currencies. The resistance level is the point where the price attains a peak value and then falls and changes the direction of the market.
Experts opine that there are no hard and fast rules to placing a stop-loss limit in the currency exchange market. A beginner should study a lot and practice in the demo account to get a clear idea of how to use this technique.