Even though new forex traders generally don't have a habit of using stop loss orders regularly when they trade, it is crucial to do so in order to limit potential losses trading currencies. We recommend that traders set Stop Loss orders on every open position. In the example below, we show the "Stop Loss" and "Take Profit" in action after the initial order to enter the market is executed on the MetaTrader 4 (MT4) terminal.
Step 1: Buying EURUSD (Going "long'). Like in the previous example, we use the Market Watch window (the table showing all the currency pairs and other instruments available to trade) in order double click on the instrument we want to trade. Let's assume that you want to buy 1 lot (standard lot) of EURUSD (that is, you are betting that the EUR will go up relative to the USD). When you double click on the EURUSD symbol, the order entry window below pops up. You then key in 1.00 under "Volume" and press the blue "Buy" button.
Step 2: EURUSD Trade Confirmation. A split second later, the trade confirmation message below appears on the order entry window. In this example, the confirmation number is 2762188 and the "buy 1.00 EURUSD at 1.3128 successful" message indicates that 1.00 lot of EURUSD was purchased at 1.3128. When you click on the "OK" button, you return to the main window of the platform.
Step 3: Setting a "Stop Loss" and "Take Profit" for an Open Position on MT4. Whenever a position is opened, a "Stop Loss" tied to that position should be set as soon as possible. To see the long (buy) position that was opened earlier, simply click on the "Trade" tab in the "Terminal" section of the main trading section on the MT4 platform (Screenshot 1 below). The first "Price" column shows the entry price (1.3128) and the second "Price" column shows the current market price for the corresponding currency pair (1.3123). If the position would be closed at this second price, you would realize a loss of $50 USD (1.3128 – 1.3123 = 0.0050 = 50 pips). The "S/L" (Stop Loss) and "T/P" (Take Profit) columns show "0.0000" because no stop loss or take profit levels have been set for this position. To set these levels, simply double click on the open position.
To continue our trading example, let's assume that you want to limit your loss to 20 pips (0.0020) and realize a profit if the price goes up 20 pips. Consequently, since the BUY entry price is 1.3128, the stop loss needs to be set at 1.3108 (20 pips below entry) and the take profit level at 1.3148 (20 pips above entry).
When the order entry window appears (Screenshot 2 below), simply select "Modify Order" in the "Type" drop down box and enter the price 1.3108 in the "Stop Loss" section and 1.3148 in "Take Profit." Afterwards, press the long blue button that says "Modify #2762188 buy 1.00 EURUSD sl: 1.3108 tp: 1.3148" (see Screenshot 3).
This instantly brings up the confirmation message stating that the stop loss and take profit levels were accepted (Screenshot 4). When you press "OK," you return to the main section of the platform. Notice that the under the "Trade" tab on the bottom of the platform, the open EURUSD position now shows an S/L level of 1.3108 and a T/P level of 1.3148 (Screenshot 5). These levels are shown visually on the EURUSD chart on MT4 as dotted lines. The green line shows the entry price (1.3128), the upper red one shows the take profit level (1.3148) and the red one below shows the stop loss (1.3108).
Since these stop loss and take profit orders are linked to the opened position, they remain open until either the currency price reaches the S/L or T/P level (triggering one of the corresponding orders and canceling the other) or the trader manually closes the position.
Step 4 : Execution of OCO (One Cancels the Other) Order on MT4. The combination of the previous "Stop Loss" and "Take Profit" orders on the FX platform is known as an OCO order. OCO stands for "One Cancels the Other." This means that when the price reaches either one of the specified levels, the position is closed and the remaining order is cancelled. In the example above, the price actually rose after the order was opened (see Screenshot 1 below). In reality, the price of the Euro against the US Dollar was already at 1.3152 when the first screenshot below was taken, which was 4 pips above the Take Profit level.
The second screenshot below shows (under the "Account History" tab) that the long EURUSD position was closed at a price of 1.3148 (notice that the second "Price" column shows a closing price of 1.3148). The "T/P" column also shows a price of 1.3148 highlighted in green. This occurs when the position is closed at the take profit level. When the T/P order was filled on the MT4 platform, the system automatically cancelled the other part of the OCO order (the "Stop Loss" at 1.3108).
IMPORTANT: Even though in the example above the Stop Loss and Take Profit were linked to the position after it was opened to make the example easier to understand, it is also possible to simultaneously add an S/L and T/P to the position when the entry order is being placed; that is, BEFORE the position is opened. We recommend that clients do this (at least with the Stop Loss portion of the order) to build discipline while trading currencies, and to avoid the risk of forgetting to place or deciding not to place a Stop Loss order after a position is opened.