A stop loss is the order that closes your trade when price reaches the maximum loss you accepted; a take profit closes it when price reaches your profit target. Together they define, before you enter, how much you risk and how much you aim to make. They do not guarantee results: they set limits. In this guide we cover how to place them using market logic, how to calculate the risk/reward ratio and position size, and the most common mistakes.
What take profit and stop loss are
| Order | What it does | When it triggers | What it protects you from |
|---|---|---|---|
| Stop loss (SL) | Closes the trade with a limited loss | Price moves against you to your level | A loss bigger than planned |
| Take profit (TP) | Closes the trade with a profit | Price reaches your target | Giving back profit through indecision |
Both can be set when you open the order or modified later in your platform (MetaTrader, TradingView with your broker, etc.). A stop loss is not foolproof: in very volatile moments, such as an economic release, the exit can fill at a worse price because of slippage. We explain it in spread, swap and slippage.
Where to place the stop loss
The stop belongs where your idea stops being valid, not where it "hurts less". Common references:
- Beyond a relevant support or resistance (if you buy, below the support). See the guide to support and resistance.
- Based on volatility: a multiple of the ATR keeps normal noise from stopping you out. A stop tighter than the asset's usual movement gets hit by chance.
- Outside the range of a signal candle, if you trade candlestick patterns.
Don't move the stop further away after opening to "give it more room": it is one of the typical causes of large losses.
Where to place the take profit
- At the next zone where price may react (a previous resistance if you buy).
- With a minimum risk/reward ratio defined in your plan (for example 1:2).
- In stages: close part at a first target and leave the rest with the stop adjusted. It is a style decision; test it on a demo account.
A target beyond what the market usually covers on your timeframe is rarely reached. Check the economic calendar first: a data release can cross your level in seconds.
Risk/reward ratio: how it is calculated
Ratio = distance to take profit ÷ distance to stop loss. With a 30-pip stop and a 60-pip target, the ratio is 1:2.
The ratio also sets how often you need to win to break even, before costs:
| Ratio | Minimum win rate to break even |
|---|---|
| 1:1 | 50% |
| 1:2 | 33.3% |
| 1:3 | 25% |
Spread and commissions raise that threshold. A high ratio with unrealistic targets improves nothing: what matters is that the target makes sense on the chart.
Practical example (fictional, for teaching only)
A 5,000 USD account, 1% risk per trade, EUR/USD. The prices are made up to illustrate the math; they are not a signal or the current price.
| Step | Calculation | Result |
|---|---|---|
| Maximum risk | 5,000 × 1% | 50 USD |
| Entry (buy) | — | 1.1200 |
| Stop loss | 30 pips below | 1.1170 |
| Take profit | 60 pips above | 1.1260 |
| Pip value per standard lot | usual reference for pairs quoted in USD | 10 USD |
| Position size | 50 ÷ (30 × 10) | 0.16 lots (rounded down) |
| Loss if the stop is hit | 0.16 × 30 × 10 | 48 USD |
| Gain if the TP is hit | 0.16 × 60 × 10 | 96 USD |
For more detail on position sizing, see the guide to risk management and the 1% rule. Always check the pip value and contract size with your broker.
Common mistakes
- Trading without a stop loss or removing it when price gets close.
- A stop too tight for the asset's volatility.
- A take profit with no market logic, chosen only to hit a ratio.
- Ignoring the spread: on a short stop, the cost weighs more.
- Entering right before high-impact data without adjusting size.
- Raising position size after a loss to win it back. Review trading psychology.
How AIM can help
If you send AIM a screenshot of your chart, it can help you identify invalidation levels and possible targets, and calculate position size for the risk you define. It is a support tool to organize your analysis; the decision and the risk remain yours. See how it works in AI for analyzing trading charts.
Frequently asked questions
What is the best risk/reward ratio?
There is no universal one. It depends on your win rate and on the target being realistic on the chart. A 1:2 ratio is a common reference, not a guarantee.
Can I trade without a take profit?
Yes, some traders close manually or with a trailing stop. What is not advisable is trading without a defined stop loss.
What is a guaranteed stop loss?
It is a type of stop some brokers offer with their own conditions and, usually, a cost. Check whether your broker has it.
Is a stop loss always filled at my price?
No. With market gaps or high volatility it can fill at a worse price.
How many pips should my stop be?
Enough to invalidate your idea and respect the asset's volatility; then adjust position size so the loss does not exceed your maximum risk.
Educational information, not financial advice. Trading currencies and CFDs carries a high risk of loss. Example uses fictional data.
