Have you ever had a very busy workday on which you have not found any time to focus on your trading activity? If the answer is yes, you will better be sure that you are not the only one. Many traders claim that they end up with big losses or unachieved profits after a full day at work. The reason for that is that they miss the price that they want to exit. Only trading at the market price can be disastrous if you cannot pay enough attention to the changes in the market. This inefficiency gave birth to Stop Loss and Take Profit pending orders, which are the lifesaver for that type of traders.
What Are They?
If you have an open position on your trading account, you do not have to close it by placing a market order. Stop Loss order is a type of pending order that allows traders to minimize their loss. You can place a Stop Loss order at a predetermined price level. When the market sees that level, the trading platform executes your order at that price. The benefit of that system is to avoid the possibility of losing more money in case of the continuing price change and you can limit your loss by yourself. Take Profit is working exactly the opposite way. If you have an amount of profit in your mind and want to close your position at that amount, you can place a Take Profit order to leave the market.
Ready For The Math?
While choosing where to put the price level for your Stop Loss or Take Profit order, you have to target an amount of loss or profit. Then, you have to calculate the change in profit by a point. The ratio between these two will be the number of changes that you want. If you multiply this ratio by the size of the point, you find the desired price change in points.
(Target profit/point profit) x point size = price change in points
If you add this change to the initial price, it would be equal to the Take Profit or Stop Loss price.
Take Profit/Stop Loss = initial price +/- price change in points.
To give a numerical example, let’s assume that you open a buy order of one lot of GBPUSD at 1.3830 and your target Take Profit and Stop Loss is $50.
To calculate your point profit, we have to know that one lot is equal to 100000 units of the pair. Additionally, the point size is 0.0001, which means that the price change is happening at that level.
Thus, your point profit would be number of units x point size= 100000 x 0.0001 = 10
After finding the point profit, let’s place everything into the first formula.
Point profit= 10 (Target profit/point profit) x point size =50/10×0.0001=0.0005
This is the amount of change in price to achieve a $50 profit or loss.
Remember that we open a buy order, so an increase in price represents a profit for us and a decrease would be the loss.
Stop Loss = initial price – price change in points = 1.3830 – 0.0005 = 1.3825
Take Profit = initial price + price change in points = 1.3830 + 0.0005 = 1.3835
The result is, we have to place a Take Profit order at 1.3835 if we want to get a $50 profit and a Stop Loss order at 1.3825 if we want to limit our losses to $50.