Stop Loss & Take Profit

What are Stop Loss and Take Profit Orders?

Stop loss and take profit are pending orders that traders can use to manage their positions. They both can be used to open or close trades, and they both can close trades on profit or loss. We will discuss all the sub-types later, but for now, we will only discuss the most common use of these orders, which is to close already open positions if they reach a specific profit or loss. Using stop loss and take profit orders this way, means that in case of the price reaching a predetermined level, these orders close the position.  

A stop loss is intended to limit and prevent huge losses in case the price did not move in the direction of a trader’s analysis. A take profit will lock in the profits in case the price moves in the direction of their analysis.

To further explain take profit, let’s say a trader is in a buy position on security “X” with an entry point at 1.10. The trader will plot the “take profit” at a higher price than the entry point at perhaps (1.20) to collect profit in case the price moves up to this level. 

Now for the opposite, let’s say a trader is in a sell position on security “X” with an entry point at the same price of 1.10. The trader will plot the “take profit” at a price lower than the entry point, perhaps at 1.00, to collect profit if the price does move to the downside and reaches this level.

To explain stop-loss, let’s say a trader is in a buy position on security “X” with an entry point of 1.20. The trader will plot the “stop-loss” at a price lower than the entry point, maybe around 1.10, to protect the position from huge losses, and to limit these losses to an acceptable level,  in case the price does not move to the upside as predicted. 

However, if a trader is in a sell position on security “X” with the same entry point of 1.20, they will plot the stop loss at a price higher than the entry point, maybe around 1.30, to protect the position from huge losses, in case the price does not move to the downside.