Whether you trade cryptocurrency, stock shares, precious metals, commodities, forex, or anything else, do you sometimes wonder how to best protect your capital from losses? Unlike betting on sports or other financial hobbies trading can be highly volatile. On the other side of the coin, do you seek out effective ways to lock in gains during active trades before the trend turns against you?
If you answered yes to either of those questions, it’s time to review the most relevant stop-loss and take-profit tactics used by modern investors and traders. The truth is that it really doesn’t matter what you trade, how large your account is, or how often you enter into transactions. The whole point is to know not only how to place stops and protective limits but also where to apply them on any given trade. Review the related points below and practice each technique in a demo account until you feel completely comfortable using them in live-action.
For new and experienced traders on major brokerage sites like easyMarkets, stop-losses should be among the first lessons. That’s because the simple strategy can prevent you from losing a significant amount on any single transaction. Most brokerage platforms make it easy to set stops at any point below your entry point. The above-mentioned easyMarkets is an example of a broker that offers free, guaranteed stop loss. The setting is not difficult since all you need to do is fill in the value on the chart where you want the transaction to automatically take you out. The more complex part of the task is deciding where to place the stop. That’s up to you and should be based on your own research about how the particular asset moves on a day-to-day basis. However, many people choose to restrict losses to about 10 percent below their entry point.
Take-profit is the conceptual opposite of the stop-loss. Take-profit points are above your entry price and serve to get you out of a position once a fixed amount of profit has been earned. In general, many trading enthusiasts prefer to set their take-profit about two or three times the size of the stop-loss. For instance, if you buy ABC Corp. shares at $4 and decide to set your SL at $3. Hypothetically, you could set the take-profit price at $7. That way, over a large number of transactions, you’d be taking profits that amount to three times your potential losses. That doesn’t mean you’ll always make money, but at least in volatile environments, the gains you do achieve could be larger than the losses you endure.
The Caging Strategy Explained
Many forex and stock investors use an approach in which they set take-profit at some multiple of stop-loss range. This is called a caging strategy, and it has more impact on traders who take large numbers of positions on a regular basis. If you are an active forex practitioner and actively trade one or more pairs every day of the week, it could be beneficial to employ caging. As long as you have roughly the same number of winning trades as losing ones, caging can deliver excellent results. In the example above where the take-profit was three times the stop-loss range, a person could have one winner for every three losers and break-even, hypothetically speaking.