A stop loss closes the position if price moves against you beyond a threshold. A take profit closes when price hits a preset gain target.
In plain terms — Stop loss = «exit if I lose too much». Take profit = «exit if I've made enough». Both remove emotion from the exit — if you honour them.
| Order | Function | Typical use |
|---|---|---|
| Stop loss | Caps maximum loss | Capital protection |
| Take profit | Realizes at target | Bank the gain |
| Trailing stop | Stop that follows favourable price | Let profits run |
Placement logic (general)
- Below support (long) or above resistance (short) — setup invalidation (support-and-resistance)
- Multiple of ATR — distance scaled to volatility
- Fixed percentage — simple but not universal across names
- Methodology rule — exit when the setup or model that justified the trade is invalidated (not just an arbitrary threshold)
Example — Long at €50, stop at €47 (−6%), target at €56 (+12%). Risk/reward 1:2. If price touches €47, the position closes automatically.
Stop loss is not only technical
- Gaps — price can open beyond the stop; fill may be worse than the level set (slippage).
- Whipsaw — stops too tight on volatile names cause premature exits.
- Method vs emotion — distinguish a logical stop (invalidated setup) from a panic exit.
Take profit and management
Fixed take profit banks quickly but may leave extended trends on the table. Alternatives: trailing stop, partial exit, active management rules.