We have already seen in first part of the guide how the forex market works and what are the basics of trading Forex.
Among the various Forex trading strategies for beginners we need to consider also the knowledge of some tools that allow traders to minimize losses and to act with less pressure.
There are some useful tools that can help you protect your investments from sudden and unexpected losses. These instruments are called STOP LOSS and TAKE-PROFIT.
Whenever a position is open, you can decide to close it at any time of the day (excluding holidays). To avoid significant losses in situations where you cannot have continuous control of the situation, you can establish a point of automatic STOP (stop-loss) after which the deal is automatically closed.
The trade management technique of “stop loss” is a basic skill to be included in the definition of each forex trading strategies.
The stop loss is used every time you are exposed to the possibility that the exchange rate moves in the opposite direction than you hoped for, bringing the position to accrue a loss that in time will grow without limit.
Placing the stop loss means to choose a lower price level (if you enter long) or higher (if you enter short) to the achievement of which the transaction closes automatically, allowing not to lose larger amounts of money.
You will then need to choose the price level at which to place the stop loss, perhaps by measuring the distance in pips, when you open a new position.
The placement of the stop loss is free, having no important criterion to follow. Each trader decides what is the maximum amount to lose and how far can wait until there is a market rebound.
Based on the trading you want to do, the indicators that are being used and the earnings prospects you seek, each trader can decide to put the stop loss more or less distant from the entry level.
TAKE PROFIT is the tool that can be used when you want to close a position that is profitable. These kinds of order are used to set a target profit price on a long or short position. The profit price can be set in terms of absolute price or as a percentage. There are two different orders: “take profit” (triggers a market order when market price hits the profit price) and “take profit limit” (triggers a limit order when market price hits the profit price).
This order is useful to traders operating mainly on long-term positions because it will give him the opportunity to not be always on the PC to monitor its position.
By setting these two orders, in fact, the trade automatically closes achieving one of the two levels and there is no need to stay connected to the internet waiting for predefined conditions. All the top forex brokers in Italy allow you to use these two tools.
In conclusion, the basics to learn how to operate in the Forex market are simple and few to understand. We always recommend knowing first how the market works before embarking large investments.