What is Stop Loss and Take Profit? Why do we need these pending orders? Table of Contents
Here, we want to talk about two extremely valuable tools that are available to online traders: Stop Loss and Take Profit.
You might have heard the names before, but if you’re trading online and you haven’t used these two market orders, you’re probably unaware of their full potential.
Let’s start with a quick explanations on what these market orders are.
What is Stop Loss?
Stop Loss is a market order that allows traders to set a predefined limit in which the deal will close automatically.
In even simpler terms, it means that the trader can decide at what rate the deal should be closed automatically to ‘cut losses’.
Why do you need Stop Loss?
There many advantages to use the Stop Loss while trading Forex and CFDs.
- Better control over your trading funds
- Prevents excessive losses
- Helps you to manage multiple deals
- Allows you to close deals automatically, at all hours
- Offers protection form unusual volatility
What is Take Profit?
Take Profit is a market order that allows traders to set a predefined profit level at which the deal will close automatically.
Once the deal reaches the specified rate, it will be closed without need of further intervention on the trader’s side.
Why do you need Take Profit?
It’s a bit more challenging to understand why traders use Take Profit.
After all, it’s clear why people would want to cut their losses – but why would anyone want to ‘cut’ their profits?
The answer is that the market is volatile and that once an instrument reaches a certain price level, there is no guarantee it will stay there.
The trend can be reversed and the deal could still be ultimately unsuccessful.
The point of Take Profit is to assist traders in maximizing their potential, not to mention – just like is the case with Stop Loss – to manage multiple deals at all hours of the day and night.
The real challenge of Stop Loss and Take Profit
The most serious challenge facing online traders is where to set Stop Loss and Take Profit.
Misplaced limits could result in excessive losses or prevent you from achieving your full investment potential.
There are many strategies aimed at trying to decide where Stop Loss and Take Profit should be placed, and you should take the time to do some additional reading on this topic.