Stop-loss and Take-Profit

Stop-loss and take-profit are two important tools available to forex traders when they want to plan a profitable trading strategy. The use of these tools can improve overall portfolio performance or reduce the level of risk. For this reason, the first thing a trader must do is to understand his level of risk aversion, given the expected return he wants to achieve with his strategy. Once he has decided whether he prefers to earn a lot with the risk of losing a lot, or earn less without risk, stop-loss and take-profit then provide him with help.

Stop-loss is the level that, if exceeded by a currency pair, automatically closes a position before the target is reached, generating a loss. Take-profit, on the other hand, represents the level that, if exceeded, causes the position to close automatically, generating a gain. Thanks to these two instruments, a loss or a gain is defined a priori, given the assumption that a certain level is hit. They are also very helpful in an attempt to maximize the profitability of different operations.

Where is it better to place stop-loss and take-profit? This is a question that varies from trader to trader. The most typical case is when a position is opened following the completion of a figure. In this case, the levels at which you need to close the position coincide with the key levels of the figure itself. In the case of an H&S, for example, the take-profit is positioned at the target of the figure, while the stop-loss just above the neckline. In the case in which the position has been opened in a trendline, instead, the choice is based on the presence of historical resistances or supports that could, respectively, hinder the continuation of the trend or favor it.

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