Stop Loss and Take Profit orders: Two of the most useful tools to trade the Forex market are stop loss and the take profit orders. While these are fairly simple to set up, both can be tremendously useful in your trading. A stop loss order is used to help you minimize any losses. A take profit order lets you close a position at a predetermined rate when it is reached. Used together these two types of orders are very useful for helping you maximize your profits and minimize your losses whenever possible.
A stop loss order is when you set a trade to happen if your currency goes in a direction that would cause you to lose money. For example, if you sold a currency short with the intention of letting its value decrease and buying it back for a profit, you could set a stop loss order if the currency moved upward a certain number of pips. Additionally, if you bought a currency and it began to fall, your stop loss would keep you from losing more than a particular number of pips by selling the currency automatically.
Stop losses are essential in the FX market because most traders use margins. If a margin call happens and you do not have a stop loss in place, you could end up being liable for all of the money you've lost.
Some traders use stop losses as their primary way to exit a position. For a trader with nerves of steel, there is the temptation to hold onto a currency position no matter what happens. In some cases the most pragmatic option is to simply cut your losses and move on to a more profitable trade. With a stop loss order in place, your trading window does this for you automatically.
A take profit is an automated order you set so that your account will liquidate a particular currency position if you profit by a certain number of pips. This way you ensure yourself a profit. The downside to the take profit is that sometimes you get in on the ground floor of an especially profitable trend that continues long after you've exited, and you accidentally deprive yourself of an even more profitable trade.
Within reason, both stop losses and take profits are very useful in your trading. With a stop loss you can prevent yourself from falling victim to a margin call or simply limit your potential downside. With a take profit you can keep yourself from falling into the trap of excessive greed and make a potentially smaller, but guaranteed, profit from a successful trade. You should plan both your stop loss and your take profit orders whenever you intend to make a trade and before you actually open your position.
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