Importance Of Using Stop Loss And Take Profit Orders

Trading largely involves having the right mindset and a strong disciplined approach that assists in creating consistency. At the end of the day, trading is a business, and just like any other venture, it’s important to maintain control of your wins and losses.


If you are a short-term trader, systematism is more needed than ever yet for longer-term trading, it’s still important but more flexible given that you will be taking fewer trades overall. Nonetheless, using stop loss and take profit orders can help you limit greed, fear, and overconfidence.


You could be trading a system that produces many small losses and a few big wins. In order to control those losses, you would use stop-loss orders which effectively tell you that you were wrong this time or maybe it was not the best entry. Now you can endure a multitude of losing trades but if you keep your losses under control, you only need to win a few times with rewards that are at least twice your loss per position in order to break even or end up in profit.


Let’s look at a closer and hypothetical example. Let’s say you make 10 trades per day and let’s assume that you are risking 10 points per trade for the potential to make 20 points.


If you lose 5 and win 5 trades:


Losses: -10 x 5 = -50

Wins: 20 x 5 = 100


Net profit: 100-50 = 50


Now imagine if your losing trades did not have stop-loss orders. A -10 point loss could turn to a -100 points loss if you do not have a stop-loss order and you’re not watching the screen to close manually. This is where the importance of having set orders comes in unless you are capable of being in front of the screen while trading and opening or closing positions manually.


Having stop loss and take profit orders allows you to have more control over your strategy and trading. While occasionally you might exit too early when you could have made more profit yet sometimes your exit is actually the highest or lowest a price has reached before reversing. It may be better to cash out at a specific interval than miss out on any profits in general.


With CFI, you can trade thousands of CFDs on Stocks, Forex, Commodities, Indices, and ETFs from one single platform. If you are new to the financial markets, you can start with a risk-free demo account and for the more seasoned traders, opening a real account is a straightforward process that requires very little time. CFI offers its clients many services and features including free daily webinars, dedicated account managers, daily technical reports, and highly competitive conditions that include fast execution and spreads from zero pips.


Click here to find out more.


The content present in this article reflects the opinions and views of the author and does not necessarily reflect the position of CFI. The material published on this blog is provided for informational purposes only and should not be considered as investment advice. The Company is not responsible for the decisions and choices of the investor who has full and free will to make decisions that they see appropriate upon the investor’s sole discretion.