If there is one things that is becoming a theme in this series is entry and exit points. Stop Losses and Take Profits are simply predetermined exit points. as discussed in previous entries some a major pitfall for new traders is not being willing to admit that they made a bad trade. when you put a stop loss on a trade and the trade market begins to approach that level its usually a good idea to leave the order alone. In many instances removing that stop loss can cause the trade to fall even further. When using a stop loss you can think of it as your safety net, ie. how much are you willing to lose on a give trade. are you comfortable risking 50 pips? 100 pips ? if you think that you are going to win on EVERY trade that you ever make you are wrong. One of the keys to successful trading is knowing when to cut your losses and get out of a bad trade.
As a new Online forex trader your best bet is to test your strategies in a Forex practice account. Almost all Forex Brokers offer them. when trading on your forex practice account you have the luxury of testing your comfort levels with “pretend” money. By doing this you can see how the market moves and you can see how your trades relate to dollars and cents not just pips. it is easy to say i will risk 100 pips but what if that 100 pips is equal to 5,000 dollars? are you then willing to risk that 100 pips? maybe you have to adjust your position size in order to reach a reasonable risk level.
Using a stop loss and take profit help you to manage your risk on your positions. it is very easy to then calculate what you are risking in terms of what you potential profit is. if your stop loss is 50 pips and your take profit is 100 pips then you are willing to risk 50 pips in order to make 100.