It is no secret that, just like any other type of investment, trading online comes with a certain risk factor. After all, if trading were easy, then everybody would be a millionaire!
However, understanding the risk factor in any trade is one of the most essential traits of a good trader. And knowing how to minimize that risk, so you never end up losing more than you are willing to is perhaps the key to longevity in the markets.
This is where risk management strategies like Stop-Loss and Take-Profit come in.
Simply put, Stop-Loss allows you to determine your acceptable loss in any trade. When placing a stop loss on a trade, if the market happens to go against you, your positions will automatically close once the Stop-Loss price is reached, thus preventing further loss.
The downside is that if the market direction changes after the stop-loss point is reached, you may miss out on the profits.
Take-Profit, in Layman's terms, is a risk management strategy that allows a trader to place an order for closing his position once a specific amount of profit is made.
This means you can choose the amount of profit you would be happy with and ensure the trade closes once you reach that point.
It also means you will not receive any additional profits if the trade continues going your way, but at the same time, it ensures you will not suffer a sudden loss if the market decides to change direction.
Stop-Loss and Take-Profit are essential tools in any trader's arsenal. The power to set your acceptable loss or profit threshold can be the difference between success and failure in the online markets.