When you open a trade in forex, you may wonder where to set the stop loss or take profit for this trade. This is the most common question that most of the new traders ask in the forex trading. Stop loss is used to prevent any further loss on the trade by placing the stop loss on a price level where the market can potentially change direction.
When the market reaches the price level of your stop loss, your open position order will automatically close. A take profit order executes your trade automatically too, but in this case, the take profit closes your trade when the financial market price reaches your profit target.
Take profit can be useful as it closes your trades automatically and it collects the profit from the chosen price you’ve placed. You can place a pending order and limit order such as stop-loss order, trailing stop, etc.
To help you with placing the stop loss and take profit order correctly, we will share some examples that can be useful to guide you where to place the stop loss and take profit.
Where to set the stop-loss
The image below shows a double top market pattern on the chart. We also have drawn two lines, the yellow and the pink line.
The yellow line at 1518.38 shows the stop loss
The pink line at 1514.26 shows the resistance zone
As you can see, on the chart we have a double top market pattern. And the top of the double top has created a resistance zone. The resistance zone can be helpful to help you with placing your order. We have the stop loss drawn some pips above the resistance zone. The difference between the stop loss and the resistance zone is 40 pips.
And we have drawn the stop loss at 1518.38 because that’s the best price to place the stop loss in this situation. You can see that on the left we have the wick of the candle that almost touches our stop loss. The foreign exchange market can test that wick and the wick of the candle can act as a resistance. But in this situation that we have, the forex market hasn’t touched the wick of the candlestick.
In some other situations, the wick of the candle on the support levels or resistance levels can be longer than that. So if the wick of the candle would’ve been for example 100 pips, then placing your stop loss over 100 pips could affect your risk management. Other factors that can help you where to place the stop loss as a forex trader are the previous resistance or support zones.
The stop loss in your sell/buy order depends on the currency pair too. For example, currency pairs that are more volatile then using a stop loss of 30-40 pips can be not enough. As these currencies have a lot of volatility (movement) and they can touch your stop-loss price quickly.
On volatile pairs, it’s recommended to have more pips difference between your sell/buy order and your stop-loss price. In currency pairs that have less more volatility but are safer to trade, the stop loss should not be 100 pips. There are situations where stop loss can be 100 pips, but only if you’re trading on a higher time frame such as daily or weekly.
But as we said, in currency pairs with less volatility, the ideal stop loss in your sell/buy order should be 30-50 pips.
Where to set the take-profit
Now, hopefully, you were able to learn how to set the stop loss on your orders. Let’s move on with the other important lesson, the profit target price (take profit).
The yellow line at 1488.67 is the first profit target price (take profit 1)
The pink line at 1485.87 is the second profit target price (take profit 2)
We have drawn two horizontal lines with blue and pink colors. These colors show where you should place your take profit. With two take profits, we can collect the profit near the first take profit level. And if the price reaches our second take profit, then we would collect the second take profit order and our trade would end hitting the take profit.
When you trade, you don’t need always to use more than 1 take profit, as only 1 take profit can be enough. But the reason why we have used two 2 take profits has to do with the price levels. And you may ask yourself, why we have placed the take profit order at these levels, 1488.68 and 1485.87.
In the yellow line at 1488.67, we have a previous support zone that’s shown with the arrow. And this previous zone could be a reversal point in the forex market. But you can see that the forex market broke that support zone and reached the first take profit order. And the second take profit at 1485.87 shows the second support zone. The price has reached our second and final take profit.
The examples we give on our blog are based on our technical analysis. But you as a trader should always trade according to your technical analysis.