TP and SL, short for Take Profit and Stop Loss respectively, are some of the important risk management tools used in trading to lock profits and cut down losses. Here is what they are all about.
Take Profit (TP)
Definition: The pre-set price level where a trade will automatically close to secure a profit.
Purpose: Helps lock gains when the market reaches a favorable level.
Example: If you buy EUR/USD at 1.1000 and set a TP at 1.1100, the trade will automatically close once the price hits 1.1100, locking in your profit.
Stop Loss (SL)
Definition: A predetermined price level where a trade will automatically close to limit losses.
Purpose: It protects traders from huge losses if the market moves against their position.
For example, if you place an order on EUR/USD at 1.1000 with SL at 1.0900 and the price drops to 1.0900, the trade is closed automatically to limit loss.
Key Points
Automation: In advance, the TP and SL are determined, thus, they automatically work when one is not monitoring the market.
Risk Management: They help a trader avoid making decisions based on emotions because it limits impulsive choices.
Customization: The levels for TP and SL depend on the trading strategy, risk, and market conditions.