Stop Loss and Break even in forex trading

Posted by on Nov 14, 2012

By Fabiano Trevisiol


 TAKE PROFIT, STOP LOSS, BREAK EVEN

 

Here in this brief article of our forex trading guide or manual forex trading, we will explain briefly what is the break-even or break even or breakeven, how to use it and trading in forex and getting more chances of success from it.

When we do, and we decide to enter a position in the market, most of the traditional trading strategies tell us to place a stop loss point.

 

What is the stop loss?

The stop loss is the maximum loss you are willing to accept for a given operation on the market.

Let’s take an example. We decide to buy EUR/USD 1.2500. Click on the buy button (buy) without doing anything else. In this case, our position will not have a stop loss posted and can go potentially at a loss until you reach a level which you lose the full amount of capital that we settled on our account. At that point the broker will close the position by margin call — because it has reached the maximum loss of our capital, basically we ran out of money.

However, we decide to buy EUR/USD 1.2500, but before you click on buy (sell) We place the stop loss and decide that at most for this position we can lose 50 pips. How much the price level of stop loss that would give us buying a loss of 50 pips? Simple! 1.2500-0.0050 (a pip is 0.0001, so 50 pips is 0.0001 * 50 = 0.0050). Repeating 1.2500-0.0050 = 1.2450. Our stop loss is 1.2450. If we were to sell rather than buy the calculation will be identical but instead of subtracting we use addition, i.e. selling at 1.2500 and wanting a stop loss to 50 pips, the calculation would be 1.2500 +0.0050 = 1.2550

Let’s return now to our initial sample.

 

We bought EURUSD at 1.2500 by placing a stop loss at 1.2450.

Having bought, in case the price goes up, we make profit, if the price were to go down we will lose. If it were to go down to 1.2450, we would be loss 50 pips we mentioned earlier and for which we have calculated and place the stop loss. The position in that case, once touched 1.2450 will close automatically, the loss will be accounted and we’ll gather no more losses.

Let us assume for a moment that we were good, we bought it at 1.2500 placing always stop loss at 1.2450 and quotation of EUR/USD began to rise. WELL! We’re earning our earliest pips from forex, how nice is it? After about 3 hours the price of EUR/USD will be rose to 1.2550. At that point we can make what we call it, moving the stop loss to breakeven. So we will move the stop loss to 1.2450 from 1.2500, which is our starting price. From this point on, if the price continues to rise, we continue to gain until we decide to close the position if the price were to go back, to 1.2500 the position will close and we would’t have lost anything aside from the spread that apply form the broker. The advise we give is, to recover even the spread, is adding it to move the position to breakeven. For example, if the entry point is 1.2500, the stop loss 1.2450 and spread about 2 pips, then move the stop loss to breakeven not exact 1.2500, but so we have also recovered 1.2502 the spread of brokers, in fact if the price were to go back we won’t have lost anything at all.

Some considerations on break even. The break even is applied as soon as possible, but not too soon! Usually used as a rule that when the position reached a profit in pips of stop loss initially set or so, it’s time to make this operation to break even. If the stop loss is 50 pips, when the momentary profit will be 50 pips or so, we will be able to make this shift.

We haven’t talked about the take profit, a brief mention as the take profit is always one of the possible variables that can be set during the arming of the order in the platform.

The take profit is the opposite of stop loss, determ the level of maximum profit we want to achieve and then the position will be closed automatically and we we’ll gather the profit in our account permanently. The take profit, just like a stop loss is not required, we can safely trade without using them. If we place an order without take profit, and this is going to profit,we will let it run until we decide that at the time the profit is achieved and responds to our expectations, and then we will close the position manually. Let’s just say that once you put stop loss and take profit, we can safely close the platform, turn off our pc and let the market do its work for us, if we leave one of the two or both,orders open we need to follow the position with a certain constancy and staying in front of the platform all the time or almost. It is typical for those who work on scalping, performs very fast and doesn’t use take profit or stop loss, but manually closes positions in profit or loss following them in real time.

Before I conclude, just to clarify further, I post an image of the order entry screen of MetaTrader platform, with two fields where you enter the two levels we mentioned, take profit and stop loss.

 

I hope that this lesson has been useful, until next time!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>