Placing effective risk management strategies in place is crucial. The only way you can minimise the risk of losing money is this. And, well-informed stop loss and take profit orders are placed by some of the most efficient risk management strategies.
Importance of Exit Strategy in Forex Trading
The mistake of entering a trade without having any kind of exit strategy is made by many traders. This often ends with the trader settling or facing losses for premature profits. Traders should know the exits available to them to minimize losses and lock in profits. The most commonly utilized exit strategies are take-profit (T / P) and stop-loss (S / L).
However, you need to ask yourself a couple of questions before using stop loss or profit:
How long do I plan on being in this trade for?
How much of a risk am I prepared to bear?
At what price would I want to get out of there?
So, when and how to place these orders is what you need to determine.
When it achieves a pre-determined price, a stop loss order tells the broker to sell a particular asset. For both long and short positions, stop losses can be set, taking out of the equation emotions such as fear and greed.
Most forex traders use stop loss to manage risks in their open positions in conjunction with taking profit orders. In the case of profit taking, when the asset reaches a specific price, the order is executed, closing your position for a profit. These two kinds of orders, together, will define your risk-reward ratio.
Both risk and reward are involved in every forex trade. Before deciding where to place the stop loss and take profit orders, it is important that you assess your own risk appetite.