Foreign exchange trading, also known as forex or FX trading, is the practice of exchanging one currency for another to make a profit. Unlike investing, where you will buy and own assets, trading involves speculating on price movements without taking ownership.

Forex trading is legal in the US and is regulated by the Commodity Futures Trading Commission (CFTC).

When trading foreign currency, you predict whether the asset’s price will rise or fall. It is an exciting and profitable practice that requires due diligence if you are to get the most out of your money.

When getting started in forex trading, you will need to research and build your understanding of how financial markets work.

Any kind of trading carries the risk of losing money. To try and mitigate significant losses, there are risk management strategies that you can take advantage of in trading. One of these strategies is called stop-loss and take-profit.

In this guide, you will learn about how to set a stop-loss and take-profit to maximize your foreign exchange trading potential.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

What Are Stop-Loss and Take-Profit Orders?

As a forex trader, you must accept the possibility of losing money, but there are strategies you can use to manage risk. A helpful strategy to prevent excessive losses is using stop-loss and take-profit orders. These orders reduce the chance of rapidly accumulating losses.

A stop-loss is an exit order that automatically closes a position when the market reaches a certain level. You will open a trade hoping for profit, but the market is unpredictable. A stop-loss helps you limit losses by closing a position if the price drops below a set level.

When setting your stop-loss, you will need to consider natural market fluctuations and decide how much risk you are willing to take.

There are two types of stop-loss strategies:

• Standard stops
• Trailing stops

A standard stop sets a specific price level. If the market hits your threshold, the position will close. A trailing stop is more dynamic and locks in profits as the price rises, adjusting automatically as the market moves in your favor.

Similar to stop-loss orders, take-profit orders can also help protect your trades. They automatically close a position when the price reaches a level that locks in a profit. Take-profit orders are crucial for maintaining a good risk/reward ratio and ensuring you exit a trade at your desired profit level.

Using both stop-loss and take-profit orders protects your investments from volatile market movements. These strategies help minimize losses if the market reverses. These strategies also allow you to relax as the orders monitor the market for you and automatically protect your trade.

Trading platform Plus500 makes it easy to set stop-loss and take-profit levels when opening or editing a trade. This feature simplifies trading strategies and maximizes your investments.

How Do Stop-Loss and Take-Profit Orders Work in Forex?

Stop-loss and take-profit orders are great tools for risk management and time efficiency. There are several instances where you may want to use them when trading foreign currency.

Example 1: Setting a Stop-Loss to Cap Losses in a Trending Market

In a trending market, a stop-loss helps cap potential losses while allowing you to capture profits.

For example, if you buy EUR/USD at 1.2000 during an uptrend, you could set a stop-loss 50 pips below at 1.1950.

As the price rises to 1.2100, you can adjust the stop-loss to 1.2050, locking in 50 pips of profit.

If the market reverses and the price hits 1.2050, the stop-loss will trigger, closing the position with a profit and limiting further losses.

Example 2: Setting a Take-Profit Target Ahead of Resistance

Setting a take-profit target ahead of resistance helps secure profits before the price potentially reverses.

For example, if you buy EUR/USD at 1.1200 and expect resistance around 1.1300, you could set your take-profit at 1.1280.

Setting a take-profit slightly below the resistance level will lock in profits before the price faces a possible pullback.

In Forex trading, stop-loss and take-profit levels are often set based on pips, which measure the change in value between two currencies. For example, if you enter a trade at 1.2000 and set a stop-loss 50 pips away, it will close at 1.1950.

Similarly, with a take-profit target of 100 pips, your trade will close at 1.2100 if the price reaches that level.

Traders use key levels such as support, resistance, trendlines, and psychological levels to set stop-loss and take-profit levels.

Support is the level at which prices tend to stop falling, and resistance is where prices often struggle to rise. You can use the support level to set stop-losses and resistance for take-profit orders.

Trendlines help identify buying and selling opportunities, which can inform where to set stop-losses and take-profit levels.

Psychological levels, such as round numbers, are seen as significant milestones for setting orders. Traders tend to see round numbers as optimal for buying and selling, so stop-losses and take-profits can be set at these levels.

It is important to note that stop-loss and take-profit orders do not guarantee execution at the exact price if slippage occurs, especially during volatile market conditions where prices can move quickly.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

Using Stop-Loss and Take-Profit Orders on Plus500

Placing forex trades on Plus500 is an enjoyable and straightforward process. The platform has a sleek interface and user-friendly tools that make it simple to trade using stop-loss and take-profit orders to prevent loss.

Setting SL/TP Levels When Opening a Trade

To set up a stop-loss or take-profit level when opening a trade, simply click ‘buy’ on your chosen currency and then select either ‘close at profit’ or ‘close at loss’ and set your level.

Editing SL/TP on Open Positions

If you did not set up a stop-loss or take-profit when you opened the trade but would like to afterward, you can click on your open position and select ‘close at profit’ or ‘close at loss’ and set your level.

Access to Real-Time Charts for Analysis

The Plus500 interface is clear and concise, with a +Insights feature that allows you to analyze your trades and performance.

Mobile App Features for Order Management on the Go

The Plus500 app is highly rated and allows you to trade and manage your investments on the go. You can also opt into push notifications to get news on market events right to your phone.

Using Trailing Stop-Loss on Plus500

When trading with Plus500, you can use both standard and trailing stop levels.

Benefits of Using Stop-Loss and Take-Profit Orders

Stop-loss and take-profit orders are essential for responsible trading. These tools support discipline and consistency and crucially prevent losses that could cut your trading journey short.

Some of the key advantages of using stop-loss and take-profit orders are that they:

• Reduce emotional trading
• Enforce risk/reward planning
• Protect against large losses in volatile markets
• Allow you to manage trades without being online constantly
• Are especially useful for part-time traders or those trading on the go via Plus500

Tips for Setting Effective Stop-Loss and Take-Profit Levels

To get the most out of stop-loss and take-profit orders, you will need to learn how to set effective levels that are neither too tight nor too far away.

Getting it right will come with experience, but there are some tips you can follow as you get started.

Use Technical Indicators

As well as support and resistance (explained above), you can also use ATR and moving averages to set your stop-loss and take-profit levels.

ATR, or Average True Range (ATR), measures the degree of price movement. You can use this data to ascertain the natural price fluctuations of an asset and place your stops accordingly.

Moving averages calculate the average closing price over a set period, so you can look past fluctuations and see what price the position has previously closed at. For the best chance of closing on a higher price, you can set your stop-loss just below the moving average.

Adjust Stops Based on Volatility

Once you have placed your stop-loss and take-profit levels on your Plus500 account, you can continue to adjust them.

You must make use of this feature and change the stops based on market volatility and price fluctuations.

Determine the Risk-to-Reward Ratio

It is a good idea to calculate your risk-to-reward ratio to work out your potential profit and potential loss.

For example, if you have a ratio of 1:2 or 1:3, the potential profit is two or three times greater than the risk.

Avoid Emotional Bias

Trading based on emotions such as fear and overconfidence can lead you to make rash decisions that could lose you money. Always use data such as performance analysis to inform your trading.

Practice With a Plus500 Demo Account to Test Different Setups

One of the many advantages of trading via Plus500 is that you can use a demo account to familiarize yourself with the system. With an unlimited virtual balance, you can make trades and set limits with no risk.

Frequently Asked Questions

Final Thoughts

While there is always risk when trading currency or any commodity, stop-loss and take-profit orders are excellent tools to help prevent significant loss.

Incorporating these tools in your trading will not only minimize risk but also build habits such as only trading what you can afford and not chasing unnecessary profits.

Using stop-loss and take-profit orders is simple when trading on the Plus500 platform, as you can activate them with just one click. You can also add the limits to trades after you have opened them.

With its easy-to-use interface and mobile app, Plus500 is a great platform for forex trading.

WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.