What are stop loss and take profit orders?
A stop loss is an order that closes your trade automatically if price moves against you to a level you set in advance, capping the loss. A take profit is an order that closes the trade automatically when price reaches your target, locking in the gain. Together they define the risk and reward of a trade before you enter, so the outcome no longer depends on decisions made in the heat of the moment.
A good stop goes where your trade idea is proven wrong, not at a random distance. A good target goes where price is likely to meet opposition, and should be large enough relative to the stop to make the trade worthwhile.
How stop loss orders actually fill
Understanding the order type matters, because a stop is not always filled at the exact price you set.
- Stop (stop-market) order: once price touches your level, the order becomes a market order and fills at the next available price. In fast markets or on a gap, that can be worse than your stop. This difference is called slippage.
- Stop-limit order: once triggered, it becomes a limit order that will only fill at your limit price or better. This avoids slippage but means the order may not fill at all if price jumps past it, leaving you in a losing trade.
- Guaranteed stop: some CFD and spread betting providers offer stops that are guaranteed to fill at your price even through gaps, usually for an extra fee or wider spread. Availability depends on the broker, so check the relevant broker comparison or review.
- Trailing stop: a stop that moves in your favour as price moves, by a fixed distance or according to a rule, but never moves back.
Take profit orders are normally limit orders, so they fill at your target price or better, but only if price actually trades there.
Four ways to place a stop loss
1. Structure-based stops
Place the stop just beyond the swing high or low, level or pattern that your trade relies on. For a long trade from support, that means a little below the support zone, with some extra room for the spread and normal wicks. This is the most widely used method because it ties the stop to the reason for the trade. Our support and resistance guide explains how to find those levels.
2. Volatility-based stops (ATR)
The Average True Range measures how far a market typically moves per candle. Setting the stop at a multiple of ATR, often 1.5 to 3 times, keeps it outside normal noise and automatically widens it in volatile conditions. See the ATR indicator guide for how it is calculated.
3. Indicator-based stops
Some traders place stops beyond a moving average, a Bollinger Band or a recent channel. This works best when the indicator is part of the original setup, rather than chosen after entry.
4. Time stops
A time stop closes the trade if it has not worked within a set number of candles or days. It frees up capital and attention from trades that are going nowhere.
Avoid placing stops purely by money ("I will risk $50, so the stop goes $50 away"). Decide where the stop belongs on the chart first, then adjust the position size so the money at risk fits your plan.
How to set a take profit
- Next opposing level: the nearest resistance for a long, or support for a short. Placing the target slightly before the level helps ensure it fills.
- Fixed risk multiple: a target set at 1.5R, 2R or 3R, where R is the distance from entry to stop.
- Measured move: the height of a range or pattern projected from the breakout point.
- Partial exits: close part of the position at a first target and trail the stop on the rest.
The target and the stop are linked through the risk-reward ratio and your win rate. The breakeven win rate for a given ratio is 1 / (1 + reward-to-risk). At 1:1 you need to win more than 50% of trades to profit before costs; at 1:2 you need more than 33.3%; at 1:3 more than 25%. Higher ratios are not automatically better, because more distant targets are hit less often. You can compare combinations with the risk-reward calculator.
Worked example: ATR-based stop and 2R target
You plan to buy GBP/USD at 1.2650. The 14-period ATR on the daily chart is 80 pips, and your rule is a stop at 1.5 x ATR with a target at 2R.
| Step | Calculation | Result |
|---|---|---|
| Stop distance | 1.5 x 80 pips | 120 pips |
| Stop loss price | 1.2650 - 0.0120 | 1.2530 |
| Target distance | 2 x 120 pips | 240 pips |
| Take profit price | 1.2650 + 0.0240 | 1.2890 |
| Risk budget | 1% of $20,000 | $200 |
| Position size | $200 / (120 pips x $10 per lot) | 0.1667, rounded down to 0.16 lots |
| Loss if stopped | 120 x $1.60 | $192 |
| Gain if target hit | 240 x $1.60 | $384 |
GBP/USD is quoted in US dollars, so a standard lot is worth $10 per pip and 0.16 lots is worth $1.60 per pip. Run your own numbers with the position size calculator.
Managing stops after entry
- Never widen a stop to avoid taking a loss. That turns a planned small loss into an unplanned large one.
- Moving to breakeven can reduce stress, but doing it too early often gets you stopped out of trades that would have worked. Test the rule before using it.
- Trailing stops suit trend trades. Common methods trail behind each new swing low, behind a moving average, or at a multiple of ATR from the highest close.
- Watch the spread. Long trades are stopped on the bid price and short trades on the ask, so spreads that widen around news or at the daily rollover can trigger stops that the chart does not appear to reach.
Stops and targets are one part of a wider approach covered in our risk management in trading guide.
Trading involves substantial risk of loss and is not suitable for every investor. Stop loss orders limit but do not eliminate risk, since gaps and fast markets can cause fills worse than your stop price. Read our full risk disclaimer before trading.