28. What are stop loss and take profit?
Stop loss refers to the situation that the investors choose to close their positions when the loss has reached a preset amount or has reached a specific price level.
As a method of risk management, stop loss aims to control the loss within a certain range. From the perspective of investment, only one wrong decision could lead to a total loss. To avoid the risk of big capital loss, setting stop loss is an important practice and standard in the investment journey. A good investor must have good habits.
Investment leads to profit or loss. Take profit means that when the market goes in the right direction, and the profit has reached a preset amount or has reached a specific price level, investors decide to close their positions.
From the perspective of investment, the trend of the market would never continue forever. Also, nobody can ever perfectly predict the timing of the market trend change.
To avoid missing the best chance to leave the market, the take-profit setting allows investors to try to maximize their profit as much as possible and leave the market at a better price before the trend changes.
Types of orders on the platform
No one can optimally monitor market trends 24/7 for daily trading. To help investors to open or close positions at the best price, many online trading platforms allow investors to preset their orders.
Let’s take a look at the types of orders of the most famous and popularized MT4 platform.
Related Article: What is MT4?
A market order is the simplest order of all types of order. It allows investors to open or close their position at the current market price level. But one thing is that investors should understand that the market price sometimes fluctuates quickly. The orders may not be executed at the price that investors have seen. There may be a little difference between the expected/intended price and the actual executed price.
A Pending order allows investors to preset buying (long) or selling (short) orders at a specific price.
When the market price reaches the preset price, the pending order will be triggered and turn into the market order immediately.
In practical, Stop Loss and Take Profit are also pending orders known as Stop Order and Limit Order attached to the positions of the trader.
However, there are two types of Pending Order when traders do not have any position.
a.Sell Limit/Buy Limit
If a trader wants to buy (long) at a lower price or sell (short) at a higher price, they can make good use of the functions of Sell Limit/Buy Limit. For example, current gold price stands at $1,865, if the traders assume that there will be a new uptrend/rebound when the gold price goes back to $1,850, then they can set a Buy Limit order at $1,850, which is lower than the current market price
If the prediction is correct, when the price reaches $1,850, the Buy Limit will be triggered and turn into a buying market order at $1,850. Thus, the Buy Limit/Sell Limit order is generally worked for transactions of “buy low and sell high”.
b.Sell Stop/Buy Stop
Sell Stop and Buy Stop orders are also known as breakout trading. If traders assume that there will be a further uptrend or downtrend when the price breaks the specific level (usually refers to technical support or resistance level), they can place a Buy Stop or Sell Stop order to seize the opportunity for profit.
For example, if the current gold price stands at $1,890, if traders predict that the gold price will continue going upward after breaking through $1,900, they can place a Buy Stop order at the level of $1,900. When the price touches that price level, the order will be sent to the market as a buying order at $1,900.
Investors should know that the functions of stop loss, take profit or entry orders are parts of the investment strategies. Since nobody can monitor the market move all the time, traders can preset orders by these functions, to strive for a better price, a better chance of profit and manage risk.
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted by this article. Please be firm in your thinking and do the corresponding risk control.