Stop Loss and Take Profit

The Stop Loss and Take Profit orders are indispensable tools for traders when it comes to managing their deals. The market is unpredictable in nature, and one can never say for sure where the price will move next moment. At the same time, it is quite difficult to be always on guard and watch the open deals. Stop Loss and Take Profit orders help traders not to miss the right moment and close their deals when needed. 

The Stop Loss is intended for limiting possible losses in case of negative market movements. When opening a deal, a trader places the S/L order with a broker to close a deal when the asset reaches a certain price. At that moment, the S/L order turns into a market order that is closed at the best available price. For example, a trader buys a EUR/USD pair and places an S/L order 50 pips below the purchase price. Should the pair decline, the S/L order will be activated, and the pair will be sold as a market order. Similarly, the Stop Loss order can be placed above the current price in case of sell positions. 

The use of a Stop Loss is a controversial issue. Some traders believe that the S/L is a must because it helps to prevent significant losses. Others think that while limiting losses, the S/L order can also limit profits. As the price movement is often unpredictable, it can cross the Stop Loss line, but then move according to the trader’s expectations. In this case the position is closed with losses though it was possible to close it with profit. 

The Take Profit order works in almost the same way as the S/L: the deal gets closed once the price reaches a certain level and the T/P orders turns into a market one. However, the T/P order is intended not for limiting losses but for fixing profits. Usually, T/P orders are applied in conjunction with S/L orders. 

Similar to the Stop Loss orders, there are pros and cons of using the Take Profit. On the one hand, traders don’t need to second-guess and close the deals manually. On the other hand, T/P orders are executed at the best available price regardless of the asset’s behavior. After reaching the T/P level, the asset can start moving higher, but the T/P order gets executed at the very beginning of the breakout, thus resulting in lost profits. 

As a rule, the decision on whether to use the Stop Loss and Take Profit orders depends on the individual strategy of a particular trader. Therefore, there is no single opinion on the necessity of using the S/L and T/P orders.