In our last lesson we started our discussion on the different order types available to forex traders with a look at the market order. In today's lesson we are going to continue our discussion on order types with a look at the all important stop loss order as well as something which is known as a limit order.
As we've discussed extensively in the money management section of our basics of trading course in the free course section of InformedTrades.com, it is not normally how good a trader is at finding entry points that separates the profitable traders from the unprofitable traders, but how good a trader is at exiting their positions.
Successful traders know that no trader is right 100% of the time over the long term, so they always have not only an entry price and profit target for their trade but also a price at which they will close out their trade should the market move against them.
Luckily most electronic platforms including the one that we have been practicing on, allow traders to leave standing orders on the platform which will close their trade if their stop loss level or take profit level is reached. This allows traders to step away from the computer if needed instead of having to sit and wait for the market to reach their level. Because these orders are executed automatically, some traders also use them to better manage the emotions involved with closing out positions when their target price or stop loss levels are hit.
To see what I am talking about lets login to our real time demo trading accounts
and place some more trades. If you have not done so already I encourage you to pause this video now and click the link above this video if you are watching on InformedTrades.com or in the description section if you are watching on YouTube and register for a free demo account so you can follow along as well.
Lets say for example that your analysis tells you that the current price for EUR/USD is a good sell price. Your analysis also shows you that 20 points above the current price would be a good level to exit the trade at a loss should the market move against you and that 50 points below the trade is a good level to exit the trade at a profit should the market move in your favor.
As we know from our previous lessons the first step in the process to place this series of orders is to place the market order, so go ahead and click on the buy rate for EUR/USD and execute a 1 lot trade in EUR/USD.
Once that trade is executed it should show up in the open positions window of the platform where you can see the open and current close price for the trade. In this window you will also see a column that says "Stop". Left click on this column which will bring up the stop loss window. In this window you also have a line that says "rate" in this box you can change the rate to reflect the rate at which you wish to be taken out of the market should the market trade against you. In this example we said we would like to be taken out of the market if it trades 20 pips against us so adjust the number in this window to reflect that and then click ok. Once you have done this you should see you new stop loss order appear in the stop column of the open positions window where you now have an order which will close out this position should it reach that level.
Next click the limit column in the open positions window which will bring up the limit or take profit order window. As we said in our example we want to be taken out of the market at a profit if the market moves 50 pips in our favor so adjust the rate in the rate line of the window to reflect this and then click ok. Once you have done this you should see a new limit order appear in the limit column of the platform which will close this position should the market reach that rate.
Both the stop loss and limit order on this particular platform are known as One Cancels Other or OCO orders which means that if your stop loss or limit price is hit, not only will the trade be closed but the opposing stop loss or limit order which was not hit will be canceled as well.
Lastly if you wish to change the rate for either your stop loss or limit order you can do so by simply clicking on the stop or limit column again and adjusting the rate accordingly.
For tonights homework assignment I encourage you to use some of the tools we have learned about in our trading basics course to find trading opportunities and place a trade with both a stop and a limit using the knowledge we have learned here today. If you would like to share your trade and analysis with the InformedTrades.com community I am sure we would all love to see it.
Thats our lesson for today. In our next lesson we will go over another type of order which can be used to enter the market which is known as an entry order so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!
Other Links to Help You Learn About Stop Loss Orders
InformedTrades Stop Loss Archive
Stop loss methods while stock trading
Stop Loss Trading Tips for Long and Short Positions
Setting Stop Loss Orders -- Technical Analysis Education