Avoid These Three Mistakes When Placing Take Profit and Stop Loss

Placing Take Profit and Stop Loss is a fundamental skill in trading. Avoid the following mistakes to steer clear of unwanted Margin Call risks. Typically, a trader should be able to assess risks and rewards before opening a position. In reality, setting Take Profit and Stop Loss is a basic strategy to control losses and consistently achieve profits. However, many novice traders often repeat these mistakes until they eventually face Margin Calls.

Avoid These Detrimental Mistakes

a. Setting Take Profit and Stop Loss Too Close 

The Forex market differs from stock or commodity markets. Price volatility occurs more frequently in the Forex market because there are no restrictions for anyone to place giant trading volumes whenever they desire. Habitually setting Take Profit and Stop Loss too close from the entry point can result in losses. For example, in the USD/JPY (H4) chart above, the price already hit the Stop Loss limit before the uptrend reversed. This habit is often practiced by scalpers who assume prices will quickly hit the Take Profit or Stop Loss limits.

b. Incorrectly Determining Lot Size as a Reference for Setting Take Profit or Stop Loss 

Novice traders often just shift Stop Loss to the size of the capital allocation at risk without considering market volatility. For instance, a trader sets Stop Loss and Take Profit too close to the entry position due to overlooking the volatility of the traded currency pairs.

c. Setting Take Profit and Stop Loss Directly at Support and Resistance Levels 

Placing Take Profit and Stop Loss directly at Support and Resistance levels often results in losses. Prices often experience reversals or corrections before hitting these boundaries. Novice traders should understand that market prices do not always strictly follow Support and Resistance lines.

Where Does the Problem Originate?

All mistakes in setting Take Profit and Stop Loss stem from immature thinking patterns. As beginners, traders often enter live trading without sufficient understanding of risk and reward management. They tend to be too emotional in making trading decisions.

How to Rectify Mistakes in Placing Take Profit and Stop Loss

a. Provide Adequate "Breathing Room" between Stop Loss, Take Profit, and Entry 

Setting Take Profit and Stop Loss while considering market volatility can help avoid these mistakes. Use volatility figures as a benchmark to determine the ideal distance between Stop Loss, Take Profit, and Entry.

b. Determine Realistic Take Profit and Stop Loss Levels First, Then Calculate Trading Size

After determining the realistic distance for each pair based on its volatility, calculate the trading lot to be opened. Use accurate calculations to determine the trading capital per position.

c. Use Support and Resistance Levels Only as a Guide 

Consider Support and Resistance boundaries as mere guidelines. Use Fibonacci retracement as a benchmark to determine the ideal Take Profit and Stop Loss positions.

Placing Take Profit and Stop Loss requires discipline and a high understanding of the market. Avoid common mistakes such as setting them too tightly, incorrect Lot sizing, and placing Take Profit and Stop Loss directly at Support and Resistance boundaries. By improving thinking patterns and implementing appropriate strategies, traders can avoid unnecessary losses in forex trading.

Share: