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What is take-profit and stop-loss in forex?

  1. Take-profit: When you open a trade (selling USD and buying EUR, for instance) and the price moves in your favour (EUR rises against USD), you will gain profits. But that’s only on the books. If the market reverses at this time, your profits will progressively lessen until you finally suffer losses. In order to cash in on booked profits, you need to close the trade. Take-profit can be done manually (referring to the euros bought before the sell-off, buying back dollars) or pre-set in advance. Take-profit orders come with price limits. Upon reaching the price limit set by you, it will automatically become a market order and immediately close based on the current market price.
  2. Stop-loss: If the previous example is reversed and when you open a trade, euro depreciates and dollar strengthens, the direction of the price change is not good for you, thus you are losing money on the books. In this case, it is necessary to stop loss in order to control risks and prevent the loss from expanding without limit, thereby retaining your financial backing for subsequent trades. To do this, you will still need to close the trade to stop loss. Stop-loss can be done manually or by placing a stop-loss order in advance. This order also comes with a price limit. When the price reaches your pre-set limit, it will convert into a market order and close the trade.
  3. In addition, there are also the concepts of “profit stop-loss” and “trailing stop-loss”.  

    Profit stop-loss for instance, is if I intend to earn US$100 take-profit, but the price has failed to exceed US$85 for several times, resulting in signs of reversal. In this case, the previous stop-loss should be adjusted (e.g. the a stop-loss of US$30) to a stop-loss of when there is a US$75 profit. This is to prevent profitable orders from turning profits into losses when profit forecast is not met, while still gaining partial returns.  

    Trailing stop-loss provides similar features. While the mechanism is the same as profit stop-loss, it is even more automated and convenient. When the price is moving in the favourable direction for you, stop-loss will be increased at the bank’s or broker’s server. For example, a stop-loss of US$30 with a book profit of US$20 will have a stop-loss position of US$10 loss. When the book profit is US$50, then the stop loss position is US$20 profit. However, the price will not reduce stop-loss when the price goes down. That is to say, if the market reverses when there is a book profit of US$50, your stop-loss is still at the position of US$20 profit. When the price limit is reached, it will acquire profits automatically and close the trade. The latter is more trouble-free and highly automated. But for experienced professionals who are on a full-on market watch, manual operation may be more beneficial for profits.