In forex trading, breakeven is a term used to describe a trading strategy where a trader adjusts their stop loss order to the entry price in order to eliminate the risk of losing money on a trade.
When a trader opens a position, they typically place a stop loss order to limit their potential losses in case the trade moves against them. By adjusting the stop loss order to the entry price, the trader is effectively reducing their risk to zero, meaning that even if the trade does not go as expected and eventually gets stopped out, they will not lose any money.
While breakeven in forex trading eliminates the risk of losing money on a trade, it also means that the trader is not making any profit either. It is essentially a protective measure that allows traders to preserve their capital and avoid losing money unnecessarily.
Breakeven in forex trading can be useful for traders who want to adopt a risk-averse approach to their trading or who want to protect their profits on a winning trade. However, it is important to note that adjusting the stop loss to breakeven too early can also limit the trader’s potential gains if the trade continues to move in their favor.
An Example of Breakeven
- You buy GBP/USD at 1.4050
- You set an initial stop loss at 1.4010.
- Price rises to 1.4090.
- You change stop loss to 1.4050 (breakeven level).
- If the price falls back to 1.4050, your trade neither makes a profit nor a loss. It is a breakeven trade.
How to Calculate Breakeven Percentage
To calculate the breakeven percentage, here’s the formula:
Breakeven % = (Stop Loss / (Profit Target + Stop Loss)) x 100
