How to Set Stop Loss and Take Profit in Stocks and Forex Trading

Trading stocks and forex is not just about the right time to buy instruments. but also when it is the right time to sell (point out) so that traders get the profit they want. This valid selling time can occur for two reasons: make a profit and stop loss.

Take profit is the price level at which the trader sells his asset for profit. Stop Loss is the price level at which the trader sells the asset to avoid a deeper loss.

Both price levels for these exit points must be carefully considered. So that traders do not lose huge losses or fail to maximize profits, how to set Stop Loss and Take Profit? Here are some tips:

1. Using a fixed risk-reward ratio

The first way to determine ideal take profit and stop loss levels is to use a fixed risk-reward ratio. The risk-reward ratio is the ratio of a trader’s wins and losses over a period of time.

For example, a day trader opens 10 positions in a day. Out of 10 trades, 6 wins and 4 loses, which means that the risk-reward ratio a trader has is 3:2 or 1.5.

You can use this fixed risk-reward ratio to determine your take profit and stop loss values ​​by multiplying it by the nominal value of the price you can sacrifice on each trade. For example, you bought Share A for 1,000. IDR per share and 10% risk tolerance, which means You must be prepared to place Stop Loss when the price drops to Rp 900 per share and ready to take profit when the price reaches the level of 1150 per share. The amount of 1.150 is derived from a sum between 1000 and 1.5 x 100.

for stop loss You can set the fixed reward risk ratio level by using the feature. trailing stop lossEspecially if your acceptable risk level is a percentage. So that the selling price level to avoid these losses increases as the price increases.

2. Using Fibonacci Retracements

Fibonacci’s retreat It is a way to build resistance and support based on the golden ratio created by Fibonacci. The specialty of the resistance and support lines created using this method is the flexibility to automatically change the price. In addition, a single chart can have several additional lines at once.

This is considering that this mathematician’s golden ratio didn’t just evolve into two. To use this indicator as a way to determine the stop loss and make a profit in principle You should use ratios 0.382 and 0.618 for take profit and the line from the bottom ratio is the stop loss level.

to understand more how to use You can see the following pictures:

In the picture there are several lines according to the golden ratio. for profit Traders can set exit points when the price touches the 0.382 and 0.618 lines (38% and 62.8% in the figure), while the ideal stop loss can be set at the bottom line.

3. Using price patterns

Although stock prices and exchange rates move according to market conditions at certain times. whether we realize it or not These price movements produce certain patterns. Traders can use these patterns to make appropriate trading decisions. This includes in terms of setting stop loss and take profit levels.

Just take the triangle pattern as an example. Triangle patterns are price patterns formed by resistance and support Close to each other (converge). This pattern is characterized by the distance between two lines that shrink away from each other.

To understand how to determine your ideal stop loss and take profit using this pattern. Lets look at the following picture:

As you can see, there are 4 points in the descending triangle above: A, B, C and D. You should keep in mind that in this case Profitable traders are traders type. short seller. but no matter what type How to make profits and avoid losses using this pattern remains the same.

In this case, the trader can place a stop loss at point C or the point at the shortest distance between support and resistance. Profit takes place at the price level D and the distance between points C and D must be equal to the distance between points A and B.

In addition to the triangle Traders can also use other price patterns to determine ideal stop-loss and take-profit levels, such as using a flag pattern or using a cup and handle pattern. Because each pattern has a different appearance and shape. It’s a good idea to study each pattern specifically.

4. Using technical indicators

There are currently hundreds or thousands of technical indicators based on statistical data used in trading. Each technical indicator has its own characteristics and effects. Many of these technical indicators can be used as a reference to determine the ideal stop loss and take profit levels.

An example is Bollinger bands. This technical indicator created by John Bollinger is in the form of 3 lines that move according to the asset price movement. The first and third lines are the upper and lower Bollinger lines, while the second in the middle is the upper and lower Bollinger lines. simple moving average (high school).

Simply put, you can set a stop-loss level at the level of the price crossing the SMA line and set a profit target when the price touches the upper Bollinger line (if you open a long position) and touches the lower Bollinger line (if it is short, sellers).

However, since the movement of these three lines is based on the overall price movement, You also need to consider the risk-reward ratio. to prevent buy and sell signals from appearing at any time

In addition to planning when to set stop loss and take profit levels Traders also need to consider the speed of execution of the trading plan. The reason for this is the price of stocks, forex and other financial assets. It can be changed in minutes and seconds. to solve this problem You can set an exit point plan using the limit command. and market orders if needed to be executed as quickly as possible.