Stop-loss and take-profit orders

A stop-loss order automatically closes your trade if the price moves against you to a set level, limiting your loss. A take-profit order automatically closes it when the price reaches your profit target.

Why use them

Markets can move while you are asleep, at work or away from the screen. These orders put your plan into action without you needing to watch every tick. They also help remove emotion: deciding your exit before entering stops you from hoping a losing trade will "come back".

Where they go

• For a buy (long) trade, the stop-loss sits below your entry and the take-profit sits above it.
• For a sell (short) trade, the stop-loss sits above your entry and the take-profit sits below it.

A worked example

• If the price falls to 1.0970, the trade closes with a loss of about 30 x $1 = $30.
• If it rises to 1.1060, the trade closes with a profit of about 60 x $1 = $60.

Risk-to-reward ratio

Comparing the distance to your stop-loss with the distance to your take-profit gives a risk-to-reward ratio. In the example, you risk 30 pips to target 60 pips, a ratio of 1:2. A favourable ratio does not guarantee profit, but it means you do not need to win every trade to cover your losses.

Things to know

• Place stops at levels that make sense for the market, not so tight that normal price noise closes the trade.
• A trailing stop follows the price as it moves in your favour, locking in some profit.
• Stop-losses are filled at the next available price, so in a gap or very fast market you may get slippage and lose more than planned.

Key takeaways

• A stop-loss caps your loss; a take-profit locks in a target gain.
• For buys, the stop goes below entry; for sells, above.
• Risk-to-reward compares the stop distance with the target distance.
• Stops can slip in fast markets, so exits are not always exact.