Today we will focus on a couple of basic tools that will be useful for every trader and investor, regardless of what strategy they are trading, how they treat risks and how long they keep positions open. We will talk about stop-loss and take-profit - two automation tools that will help to exit a trade in time.

WHAT DO THEY HAVE IN COMMON?

Stop loss and take profit are also called stop orders or stop orders. These are instructions to the broker, which the trader puts in advance, usually together with setting the basic parameters of the order - the choice of asset and the required volume. In them, he specifies the allowable limits of falling or rising quotes. If the price reaches them, the necessary asset will be bought or sold automatically. The main advantage is that a trader or investor determines the allowable limits for himself in advance, after which he can not follow the price movement, knowing that at the right moment stop orders will be triggered automatically. Thus, he can lock in a profit or loss.

MORE ABOUT STOP-LOSS

Stop loss (from the English "stop loss" or simply sl) is a pending order that can be used to limit losses (literally "stop loss"). It works as follows.

When trading long, a trader does not want to lose money when the price of an asset drops significantly, so he sets the "lower boundary" just below the market price of the asset. As soon as the price falls to the set value, the asset will be sold automatically without waiting for an even bigger drop. At the same time, setting a stop order does not cancel the possibility to close the position manually, but only serves as a safety net against a sudden price drawdown during the absence of the trader.

For example, you own shares of a company that are currently trading at a price of 100 rubles per share. You are waiting for growth, and in case of a drawdown you are ready to lose no more than 5% of their price. Accordingly, the stop loss should be set at the level of 95 rubles.

When trading short, on the contrary, the stop-loss is set above the market price. For example, owning shares of the same company, you expect their drawdown and are ready to lose no more than 5%. The limit in this case will be set at the level of 105 rubles.

HOW TAKE PROFIT WORKS

Take profit (from the English "take profit", tp) is a pending order that allows you to "take profit". This does not mean that it will be maximized, but it allows you to catch the moment when you can get the expected level of profit on the deal.

When trading long, take profit is set above the market price. For example, the price of a stock is growing, but there is a probability that this growth is short-term, and instead of "catching" the reversal point, you expect in advance that you will close the deal with a small but guaranteed profit of 10%. Accordingly, for a stock with a market price of 100 rubles, take profit should be set at 110 rubles.

When trading short, take profit is set below the market price, in the expectation that it will fall even more.

THREE PROBLEMS

In general, the principle of operation of both stop orders is simple, logical and clear. But in fact, everything is simple only on paper, and in real trading an unprepared trader may face several problems.

The first one is most convenient to consider the following example: you trade long, set take profit, but the price, not reaching the specified limit, falls sharply, leaving you with a loss. Fortunately, this problem can be solved - it is enough to set two orders at once - both tp and sl. Accordingly, the triggering of any of them closes the position.

The second problem is that sometimes stop loss triggers as if by itself. That is, there is a sharp drop in price (when trading long), the order is closed, and the price continues to grow as it was growing before. The point is that the price is influenced by large volume trades, for example, by large investors. The only thing that can be recommended in this case is to be more careful when setting stop orders and be ready that they may work prematurely.

The third problem is slippage. It is related to the peculiarities of the stock exchange. Its essence is that sometimes the price changes so sharply that it "slips" the set values, leading to the fact that the deal is closed with a loss slightly larger than initially expected by the trader. For example, the trader expected to sell shares at a price not lower than 105 rubles, but from 107 it immediately collapsed to 102, leaving the trader with losses.

HOW TO SET TAKE PROFIT OR STOP LOSS

They are set when creating an order in the trading terminal in the appropriate fields. It is usually specified as an interval in points from the current price.

A beginner trader is usually concerned with the question: how to determine the optimal limits that can be used to set take profit and stop loss?

The recommendation is simple: the profit level should be 3 times higher than the loss level, so that one trade "in the plus" could cover several closings "in the minus". Other ratios are also often used: 2:1 or 1:1.

As for the methods of setting stop-loss and take-profit, among the most simple and often used are the following.

Percentage

The trader himself determines the acceptable amount of losses and the desired (but achievable) amount of profit. Usually it is about 5-10% of the purchase price of the asset. Accordingly, taking into account the above recommendation, when setting the sl level at -5%, tp should be set at +10 or +15%.

On levels

Support and resistance levels are lines that attract the price chart. Accordingly, most traders operating this method usually set stop orders as follows:

• tp - just below the resistance level (upper line), expecting that the chart will turn around near it,
• sl - just below the support level (lower line), expecting that the chart may break it and continue falling.

By moving average

Moving average is one of the varieties of technical indicators, smoothing out price fluctuations and helping to understand the direction of the trend. The calculations usually vary depending on the method and timeframe used. However, traders using this indicator usually place a stop loss level below the moving average plotted on a chart with a larger timeframe.

By candlestick chart

Experienced players can read candlestick charts well, getting from them not only basic data like price, minimum and maximum, but also highlighting standard patterns that suggest further movement. You can also place stop orders based on this data. But this topic itself is very extensive, so we will not dwell on it in detail in this article.

LET'S SUMMARIZE

Stop loss and take profit are simple and convenient tools that help to better control your profits and, most importantly, to limit losses.