Two of the most useful tools available when forex trading are the “take profit” and “stop loss” pending orders. These allow traders to define when they want to close an order, either in order to maximize profits or to cut potential losses.
When deciding where to place your take profit or stop loss pending orders when forex trading, you can make use of a formula very similar to the ones we’ve gone through above.
To do so, simply do the following:
(Target profit/point profit) x point size = price change in points
Then you take your price change per point and, depending on whether you opened with a buy order or a sell order, you do the following:
- Take profit = opening price + price change in points
- Stop loss = opening price - price change in points
- Take profit = opening price - price change in points
- Stop loss = opening price + price change in points
Let’s take a look at a quick example.
You open a buy order of one lot of EURUSD at 1.2320. You decide that you want to take profit at USD 100, and your stop loss at USD 50.
Let’s do the take profit order first.
- (100/10)x0.0001 = 0.001
Remember that to calculate “point profit” you take lot size x contract size x point size, which in this case is 1 x 100,000 x 0.0001
- 1.2320+0.001 = 1.2330
We can therefore see that, if you want to get USD 100 profit off this order, you’ll need to set your take profit at 1.2330.
Now let’s do the stop loss.
- (50/10)x0.0001 = 0.0005
- 1.2320-0.0005 = 1.2315
Therefore, if want to restrict your losses to just USD 50, you need to set your stop loss to 1.2315.
Take profit and stop loss orders are incredibly important tools when forex trading to learn how to use effectively. The best way to use them effectively, as well as to manage your overall trading strategy, is to work out how much profit you want to take for each order, and how much you’re willing to lose. You can then set your take profit and stop loss orders accordingly.
Have a go yourself by forex trading today!