Take Profit and Stop Loss: Everything You Need to Know

 One of the most important risk management tools that most traders utilize on a daily basis is the take-profit/ stop-loss feature. A thorough understanding of these instruments is fundamental to any Forex trader. Take-profit and stop-loss are not unique to Forex, though, — on the IQ Option platform it is possible to set these levels for all CFD assets like Stocks, Forex, Cryptocurrencies and Commodities.

Today we will look at how to set stop-loss and take-profit correctly. Together we will uncover the meaning of stop-loss and take-profit and see how they can be applied in practice. 

What is take-profit and stop-loss? 

The stop loss is the level at which a trader wishes for the position to close automatically. Take profit works in a similar way — setting this level means signaling to the broker that you wish your position closed at that certain level, once it is reached.

Take profit is a value that a trader chooses as the appropriate or sufficient in case the deal goes in the trader’s favor. If that particular level of profit is reached, once the take profit level is triggered, the deal will close automatically.  

Stop loss is the level of acceptable loss that a trader is willing to bear in case the deal goes against their prediction. If the set level of loss is triggered, the deal will close automatically, preventing the possible loss of the full amount of the investment. 

Pros and cons

It might not be completely clear why a trader needs to set these levels, instead of trading without them. Indeed, there are pros and cons to these tools, so let’s take a closer look at them.

Pros:

Cons:

Setting stop-loss and take-profit might help traders manage the risks associated with trading. By placing limits, traders can better operate with the appropriate loss amounts and the sufficient outcomes. Managing losses at the right time might prevent further and bigger losses. There is no need to monitor the deal once the levels are applied, since they will be triggered automatically. Utilizing autoclose levels help eliminate the emotional factor — desire to hold the asset for “a little longer”.

Rapid price changes may result in slippage, causing the deal to close further from the set stop loss. However, slippage may work in a trader’s favor, too, resulting in the position closing above the initially set take profit level. The stop loss and take profit orders may get triggered by a short-term price fluctuation, causing an unnecessary sale of the asset. Take profit may cut the possible profits in case the price continues moving in the trader’s favor

Generally, stop loss and take profit levels are widely recognized as useful risk management features. It is up for every trader to decide whether they want to utilize them in their trading routine or not.

How to set stop-loss and take-profit levels?

In order to set stop-loss and take-profit, one may follow the steps:

1. Choose the desired instrument for trading (Forex, Crypto, etc.)
2. Set the desired investment amount and multiplier and click on the “Auto Close” button
3. Set the take profit (“When profit is…”) and the stop loss (“When loss is…) values 
4. Once the necessary levels are set, a trader may open a position by clicking on “Buy” or “Sell”
5. The auto close levels will be displayed on the chart for your visual convenience. 

The sequence of steps can be seen in the following video: