Profitable trades in the Foreign Exchange market are never guaranteed. There is absolutely no doubt in the fact that around 90% of the people lose money when they start trading in FX market for the first time. Therefore, most of the traders prefer to manage and limit their losses on each trade they make and that is done by using Stop Loss. Stop Loss is like a pending order where you set up a certain price in your position whether it is already running or would trigger later on.
The stop loss price you enter would limit your loss in such a way that whenever the pair reaches that price, your trade would automatically close at that point. Even if the price goes beyond that unfavorable direction, you would not bear any affect as your trade is already closed at the stop loss point.
Suppose you enter as long on GBP/USD at the price of 1.5720 and you are expecting the price to go up, but you never know it might go below that price too. Therefore, you enter the price of 1.5690 as your stop loss that would limit your loss if in case the market moves downwards. In other words, you are risking 30 points or pips on that trade and looking forward to make profit when price moves upwards.
Don’t have enough time to sit right in front of your screen and watch your trade but want to maximize your profit? Use Trailing Stop. Trailing stop is the same as stop loss, but helps you in optimizing the profit from the trade you enter by moving with a certain point level in the favorable direction where you would earn profit. Referring to our previous example, where you set your stop loss to 1.5690, here you set the same price as your stop loss but allowed it to trail with the gap of 5 points/pips in the favorable direction. If the price keeps on moving upwards, your stop loss would follow it until the price moves back down to hit it. Even if the trailing stop hits, you would still get out of the market with profit.
Profit Limit / Take Profit
Profit limit or take profit point is another type of pending order that you set where you think the profit earned from that particular trade would be sufficient for you and you would be satisfied with it. Buying AUD/USD at price 1.0320 and setting the profit limit at 1.0370 means that when the price moves up and reaches 1.0370, the long position on Aussie that you had would automatically close, giving you the profit of 50 points/pips. Setting profit limit helps you achieve the minimum amount of profit that you want on each trade, no matter where you are or what you are doing.