As a beginner, forex trading might seem to be lucrative business; no doubt it is, but if you don’t acquire the skills of money management, this can be risky. From this context, it denotes managing the stop loss and take profit forex.
While stop loss is limiting your loss on your open position, the concept of take profit is something different.
What is take profit forex?
Also known as target price, take profit is an order that is placed to stop or limit an opened account after the prices reach a certain specified level of profit. It is static in nature. Without this order, you whole trading account would be exposed to the fluctuating and unpredictable market. The purpose of setting a take profit order is to manage your forex trade in a better way.
This is basically an area where being a trader you can feel comfortable and relaxed to walk out of a profitable trade. The broker closes the position automatically at the take profit points, the price set corresponds to.
Factors to consider while setting take profit in forex:
However, what most traders do is set this trade profit point randomly; but that’s again a wrong strategy. There are certain factors that need to be considered while setting a TP or trade profit in forex. Check them out:
- Stop loss:
Actually, stop loss and take profit goes hand with each other. The stop loss amount that you have set would help you set your trading TP. For instance, when a trader sets his stop loss amount to 50 pips in a trade, he must be prepared to set TP of 100 pips at least. Now, if trade analysis shows that a profit of 70 pips can be achieved, it’s better to forget that trade and look forward to the next opportunity.
- Time Frame:
This time frame denotes that time, taken for analyzing and finally setting a trade. Usually, with longer charts of time frame like daily chart, high profit ratio compared to risk is achieved. However, going with hourly charts make this difficult. Hence, you should try to search for time frames that give you more chances of great rewards than risks.
- Resistance and Support:
Resistance for long trades and support for short trades both play an important role in determining your take profit in forex.
a. In case of a short trade, support area helps set TP and resistance area helps in setting stop loss.
b. Again for long trade, stop loss is set just a little below support line which was used while setting trade entry. Now, Take Profit is agreed at point a nearest to the resistance.
- Expected risk reward
Forex trading if done in appropriate manner generates a huge amount of profit; that’s what it is – the largest profitable business. But there are possible risks too. For a trader to be on the safe side managing both, it is wise to keep the risk-reward ratio as 1:2 at least.
1:2 ratio means there must be 2 pips of take profit for every single pip that you have risked in stop loss. Make sure that you gain a minimum of 2 pips out of every pip that you have risked in the trade.
Above all these considerations, the most important thing to remember is that support and resistance define certain limits. And you must set the take profit forex somewhere within those reasonable limits.