The Significance of Placing Stop Loss and Take Profit Orders

For beginners who are commencing forex trading in Sri Lanka, it is always vital to remember that it is an activity that requires one to master their instincts. More often than not, traders who indulge in online share trading or forex trading, tend to trade with the desire to make huge gains. Driven by this greed, they fail to examine the exposure faced by their position and tend to close it at the wrong moment. This leads to losses that could have been avoided.

In such scenarios, using trading tools like Stop-loss and Take-Profit can help traders remove the emotion out of the equation and help traders manage their risks.

What Are Stop-Loss And Take-Profit Orders?

Stop-Loss: A “Stop-Loss Order”, also known as a “Stop-market order”, is an order placed by the trader with a broker to close a position or sell a security when it reaches a particular price. This order is used by traders to limit the loss incurred by their position when the market goes against them. Stop-loss orders are usually set by traders even as they enter into a trade. Whenever the market reaches the limit set by the trader, the order is triggered and the position is automatically closed.

Take-Profit: A take-profit order or T/P, is a limit order which is used by traders to close a profitable position when it reaches a certain price point. This point which is determined by the trader as a “take-profit point” is usually at a higher position than the entry point and despite this, the trader may want to close the trade. It is usually a counter-intuitive activity and closes the trade when it might have a possibility of climbing higher.

What Is The Significance Of Using Stop-Loss And Take-Profit Orders?

In simple words, the importance of these orders is to remove the emotion behind closing a position. Traders are often quite emotionally influenced by the positions they open. When a position starts to gain pips it is never easy for the trader to close it as more growth always translates into profits.

Unfortunately, markets do see their fair shares of ups and downs. If traders don’t close a position in time, their profits could quickly nosedive and end up as losses.

This is where limiting orders like Stop-Loss and Take-Profit aid the traders. They remove the emotional quotient behind this activity.

Another advantage is that they help minimize the risks faced by the positions when traders may be away for the night or may be on vacation. Also, planning for Stop-Loss and Take-Profit levels is an important part of forex trading strategies, and traders need to read the market carefully before nominating their positions for these orders.

For beginners who are getting started with Forex Trading in Sri Lanka, it is vital for them to read the market signs and analyze the conditions of a particular trade, its resistance, and support levels before zeroing in on Stop-Loss and Take-Profit orders. Allying with an online broker like WesternFX can help them negotiate the technicalities behind such activity and manage the risks involved in their trading activity.