What you'll learn
- Place stops and targets that reflect the trade idea
- Understand why stops can slip and targets cannot
- Avoid the common errors with both
The stop loss
A stop loss is a sell stop on a long position or a buy stop on a short, held by the broker and triggered when the price trades at its level. It then fills as a market order, so in a normal market it fills at or near its price and in a gap it fills wherever the market reopens. Some brokers offer guaranteed stops for a premium, which fill at the stated price regardless; they are worth it for positions held over weekends or through major events.
Where to put it
- Where the trade idea is wrong: beyond the level that, if broken, means your reason for the trade no longer holds.
- Beyond the noise: further than the normal range of the timeframe, which the average true range measures.
- Not at round numbers or obvious levels, where stops cluster and get hunted by ordinary volatility.
- Then size the position so that the distance to the stop risks the amount you planned; the stop sets the distance, the size sets the money.
The take profit
A take profit is a limit order at your target, so it fills at its price or better. Set it where the idea says the move should reach, checked against the risk-to-reward ratio: a target twice the stop distance gives 1:2. A target set inside the spread cannot fill; a target that is never reached turns winners into losers. Some traders use no fixed target and manage exits with trailing stops instead; the next lesson covers that.
Errors to avoid
- Trading without a stop because you will watch the screen. You will not, always.
- Moving a stop further away when price approaches it. That is the loss you planned, made larger.
- Setting the stop by the money you can afford rather than by the chart, then finding it inside the noise.
- Removing the take profit as it approaches because the trade looks strong.
Key takeaways
- A stop defines the loss; a target defines the gain; set both before entering.
- Stops trigger and fill as market orders; targets fill as limits.
- Place the stop where the idea is wrong and beyond the noise, then size to it.
- Never move a stop away from price.
Knowledge check
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This lesson is general education, not advice. Risk disclosure.