A stop loss and a take profit are the two exits that turn a trade into a plan. Setting them well is one of the most valuable habits you can build. Here’s how.
What they do
A stop loss automatically closes a position if the price moves against you to a set level, capping your loss. A take profit closes it once the price reaches a target, locking in a gain. Together, they define your risk and reward before you enter.
How to set a stop loss
- 1
Decide where you’re wrong
Pick a price that, if reached, means your trade idea has failed, place the stop there, not at a random distance.
- 2
Size to the stop
Choose a lot size so the loss at that stop is only what you’re willing to risk.
- 3
Set it when you enter
Attach the stop as you place the trade, don’t plan to ‘watch it manually’.
How to set a take profit
Set a realistic target based on the market and your strategy, ideally one that gives a favourable risk-to-reward (for example, aiming to gain more than you risk). You don’t have to catch the whole move; a planned exit beats a hopeful one.
Common mistakes
- Placing stops too tight, so normal noise closes you out.
- Trading with no stop at all, exposing you to large losses.
- Moving the stop against your plan when a trade goes wrong.
- Setting a take profit so far away it’s rarely reached.
- A stop loss caps your loss; a take profit locks in a gain
- Place your stop where your idea is proven wrong, then size to it
- Set both when you enter, not after
- Never widen a stop to avoid a loss
This guide is educational only and is not investment advice or a promise of profit. Trading involves significant risk and may result in the loss of your capital.