One of the important skills of a trader is setting stop loss and take profit. It can be said that this strategy is very difficult and requires strong analysis.
When learning about the basics of forex trading, the most common topic discussed is the importance of knowing and selecting the right place as the entry point for a position. But really, trading management cannot be ignored either because even if a trader has a good entry, he can still lose if he is unable to locate the perfect exit point.
In practice, traders should understand that the total profit earned is actually the result of the difference between the total profit and the total loss. Therefore, traders need to remember that trading success occurs when the total profit exceeds the total loss. It is almost impossible to trade without the slightest loss, so risk management is seen as very important in trading.
Basically, stop loss and take profit are part of risk management in forex trading. A trader must realize that trading is not just a profit-seeking activity, but also understand the risks involved and prepare to lose money in the process if the results do not match expectations. Moreover, the forex market is very volatile and changes quickly, so traders need a solid strategy and planning before jumping into it.
3 Fatal Mistakes Installing Stop Loss and Take Profit
So, to be able to learn more about the errors that you should avoid and how to fix them, check out the following explanation!
1. Set stop loss and take profit very close or far
This is the first mistake most traders make. Please note that the forex market can change rapidly in a short time. If you place your Stop Loss or Take Profit order too tightly or close together, the position will likely be stopped out before the price moves in the direction you want. In other words, you are too quick to assume before seeing the actual movement.
It is a mistake to set the stop loss order too far
For example, suppose you open a long GBP/JPY position at 145.00 with a stop loss at 144.90. Even if your calculations are correct if the price were to bounce around this number, there is still a chance that the price could drop another 10-15 pips before finally rising, say up to 147.00. Unfortunately, this opportunity can be missed because you are stopped at 144.90 too soon.
Therefore, it is important to give “breathing space” when setting your stop loss or take profit to avoid the scenarios described above. Not only that, but always check the volatility of your target market as this is closely related to the price fluctuations on the chart.
On the other hand, the breathing space cannot be too large either. It should be understood that placing stop loss or take profit points that are too far apart does not always guarantee profit.
Basically, these two points serve to prevent traders from losing too much by warning them that the market is not moving as expected. If both are placed too far from the entry point, the warning function will no longer be useful. Apart from that, it is also important to pay attention to the risk/reward ratio in your trading.
For example, placing a 500 pips stop loss on a daily trade requires a profit target of 1,500 pips to maintain a 1:3 risk/reward ratio. Despite this, most pairs don’t move up to 1,500 pips in a month.
2. Use position size as the basis for stop loss and take profit calculations
Using a position size of “x pips” or “x dollars” to set a stop loss is a huge mistake. In fact, the market does not move based on the number of contracts you enter, but quite the opposite; You are the one who has to adjust to the market dynamics. Therefore, you must have good analytical skills to be able to choose the most appropriate stop loss or take profit points.
It must be emphasized that the most appropriate trading flow is to analyze and set stop-loss and take-profit points before opening a trading position. The advantage is that before there is a risk of losing capital, traders can be free from emotional influences when trading, and they can objectively assess when to continue and when to stop.
3. Place the Stop Loss and Take Profit orders correctly at the support resistance limits
Apart from choosing Stop Loss and Take Profit positions that are too narrow and far apart, another mistake traders often make is placing them directly on the support resistance line. The reason is due to market fluctuations.
Traders often forget that the forex market moves in erratic patterns, so support and resistance lines cannot be used as a benchmark for setting the entire stop loss and take profit.
The possibility is that the price could reverse or change direction before it reaches the line. Prices can cross the line first before changing direction, either in the form of a reversal or breakout.
As a trader, you should only use these limits as a tool only. Although it sounds attractive and trustworthy, you also have to consider the risks.
The best way to do this is to choose the stop loss and take profit near the two dividing lines, but not directly on the line. Give space so that the price still has room to show its direction of movement even though it crosses the dividing line.
In general, if you are going to enter a long position, place your stop loss below the support line. Meanwhile, if you are going to sell, place your stop loss above the resistance line. The goal is to anticipate false breakouts so that your stop-loss order does not close the position prematurely.
For private methods, Fibonacci retracement can be the right choice. why? Because the trend in general will reverse around 61.8-78.6% and then change direction as before, so this calculation can help you choose a stop losing and taking the most lucrative profits.