The main aim in Forex is to buy cheaper and sell more expensive, or, to put it in other words, to get income. MetaTrader offers all kinds of solutions for easy and successful Forex trading. One of them is Stop Loss.
Stop Loss and Take Profit are among the most well known kinds of trade orders which are created by means of MetaTrader to close a trade under specific conditions. Since the Forex market is extremely volatile, such trade orders help traders to protect their investments.
The main function of a Stop Loss is to prevent runaway losses if your trade does not go in the direction you anticipate. As well as Take Profit it can be divided into two types: manual and automatic. Let’s take a closer look at the automatic Stop Loss.
It is activated as follows: a BUY order is opened and value of Stop Loss is being set as an absolute value lower than opening price. And vice versa: when a SELL order is opened, the value of Stop Loss is set higher than the opening price. In case the Stop Loss level is reached, the order is closed automatically.
Now look at the examples.
Stop Loss example for BUY order
Ask price=1.4040, Bid=1.4038. We open a BUY order. Opening price is 1.4040. Let’s set Stop Loss=1.4020.
Picture 1. Stop Loss set to 20 pips below open price for BUY order.
Price falls and passes the level Bid=1.4020. The order is closed automatically. The loss is accounted for 20 pips.
Picture 2. Order closed by Stop Loss.
Stop Loss example for SELL order
The situation for SELL order is similar.
Ask price=1.4040, Bid=1.4038. We open a SELL order. Opening price is 1.4038. Let’s set Stop Loss=1.4063.
Picture 3. Stop Loss set to 20 pips above open price for SELL order.
Price goes upward and passes the level Ask=1.4063. The order is closed automatically. The loss is accounted for 25 pips.
Picture 4. Order closed by Stop Loss.
Automatic Stop Loss
One of the features of Stop Loss is that it cannot be set too close to the order opening price. Minimal distance may vary and is being set according to configurations of the broker server. Value is counted from the Ask price for SELL orders and Bid price for BUY orders.
Due to the peculiarities of MT4-programming, the Stop Loss value can be modified while the order is being open. In this case the rules for setting a new Stop Loss value are exactly the same as during the order opening, the only difference being the usage of the current price value instead of the order opening price.
To make the trading process more convenient, the traders use relative values of Stop Loss in the pips, e.g., for the value of SL=25 at current price of Bid=1.4038 and Ask=1.4040, absolute value of Stop Loss for BUY order will be 1.4015, and for SELL order under the same conditions it will be 1.4063. I.e., Ask price is taken as a basis for the SELL order and Bid price is taken for the BUY order. In this way, after closing an order using the Stop Loss we will receive precisely 25 pips of loss.
Manual Stop Loss
Now let’s look at the manual Stop Loss. As we can see from the name, the manual Stop Loss is different from the automatic one in a way that when the Stop Loss level is reached, the order has to be closed manually. On the one hand it seems inefficient because extra operations need to be performed, but on the other hand manual closing proves effective on some occasions. For instance, in case of applying manual Stop Loss we can use a function of partial closure of an order under different levels of loss for one and the same order, while this function is not available in automatic Stop Loss. It means that when an order reaches the automatic Stop Loss, it will close completely.
Let’s take a look at the example. We open an order with 3 lots volume. And we will close each lot at a different level of loss. SL1=10, SL2=20, SL3=30. When the order reaches SL1 and SL2, parts of the order will be closed manually and closing of the part at the SL3 level will be performed automatically.
In this way, with the Bid price =1.4038, Ask=1.4040, the parameters will be:
- For BUY order: open price=1.4040, manual Stop Loss SL1=1.4030, manual Stop Loss=SL2=1.4020, standard Stop Loss=SL3=1.4010.
Picture 5. Automatic Stop Loss set at TP3 level and manual Take Profit set at TP1 and TP2 levels for BUY order.
- For SELL order: open price=1.4008, manual Stop Loss SL1=1.4018, manual Stop Loss=SL2=1.4028, standard Stop Loss=SL3=1.4038.
Picture 6. Automatic Stop Loss set at TP3 level and manual Take Profit set at TP1 and TP2 levels for SELL order.
Manual method of closing the orders has at least one disadvantage. If a technical failure suddenly occurs on the trader side, the order will not be closed precisely on time. In automatic method, order will close in any case regardless of technical condition of the MetaTrader terminal. That means that the trader is responsible for manual order closing, and the broker is responsible for the automatic closing. These features have to be taken into account when choosing parameters for the order being opened.