Take Profit and Stop Loss; What does each do and do I need to make use of it while trading? A must use?
Take profits and stop losses are two very common terms in the trading industry. Take profit commonly referred to as TP, stop loss as SL, is there to automatically lock in some or all profits but also limit losses. In essence, these features help with risk management. These pending orders help put a determined risk-reward ratio in place.
A take profit order does exactly what the name implies. At a set price point a partial or full position will be closed for a profit. A take profit can only be placed above your entry price in the instance of a buy and below your entry price when selling. Setting a take profit is equally as important as its opposite, a stop loss.
A stop loss plays a very important roll in risk management. As indicated by the name, a stop loss literally stops your account from incurring more losses by closing out your position at a given price point. A stop loss can only be placed above your entry place in the instance of a sell and below your entry price when buying.
Both types of orders are referred to as pending orders, waiting to be executed by the market price. They should always be used and put into place on order execution. Risk management is key to any trader’s success and account longevity.