Why Use Stop Loss and Take Profit?
Every trader dreams of catching the perfect trend, but the reality is that markets are unpredictable. That’s why stop loss and take profit orders are essential tools for protecting your account and locking in gains. Without them, you risk letting emotions take over, leading to catastrophic losses or missed profits.
"Plan your trade and trade your plan. Let your stop loss and take profit do the work."
What Is a Stop Loss?
A stop loss is a pre-set order that automatically closes your trade if the market moves against you by a certain amount. It limits your losses and keeps your risk under control.
- Prevents large, account-draining losses
- Removes emotion from trading decisions
- Allows you to calculate position size and risk per trade
What Is a Take Profit?
A take profit is an order that automatically closes your trade at a specified profit level. It ensures you secure gains before the market reverses.
- Locks in profits automatically
- Prevents greed from sabotaging your results
- Helps you stick to your trading plan
How to Set Stop Loss and Take Profit
The placement of your stop loss and take profit should be based on technical analysis, volatility, and your risk-reward ratio. Here’s a simple approach:
- Identify key support and resistance levels
- Set stop loss just beyond these levels
- Set take profit at a logical price target (e.g., next resistance for buy trades)
- Aim for a risk-reward ratio of at least 1:2 or 1:3
Example: Setting SL and TP
Trade: Buy EURUSD at 1.1000 Stop Loss: 1.0980 (20 pips risk) Take Profit: 1.1040 (40 pips reward) Risk-Reward Ratio: 1:2
Table: SL and TP Scenarios
| Entry | Stop Loss | Take Profit | Risk | Reward | R:R |
|---|---|---|---|---|---|
| 1.1000 | 1.0980 | 1.1040 | 20 pips | 40 pips | 1:2 |
| 1.5000 | 1.4970 | 1.5060 | 30 pips | 60 pips | 1:2 |
Personal Anecdote
Early in my trading journey, I used to move my stop loss further away when trades went against me. I thought, "The market will come back." Most times, it didn’t—and the losses got bigger. Once I learned to set my stop and leave it, my results improved dramatically.
"Cut your losses short. Let your winners run." — Trading wisdom
Common Mistakes to Avoid
- Not using a stop loss at all
- Setting stop loss too tight and getting stopped out by normal volatility
- Moving stop loss away instead of accepting a loss
- Not taking profit and letting a winner turn into a loser
Conclusion
Stop loss and take profit orders are your best friends in trading. They protect you from big losses and help you secure profits without emotion. Make them a non-negotiable part of your trading plan.
👉 Try our Lot Size Calculator to set your risk and stops the smart way.
