What Are Stop Loss and Take Profit? How to Set SL/TP to Limit Losses and Lock in Profits

Setting Stop Loss and Take Profit to Limit Losses and Lock in Profits

For beginner traders, trading in financial markets—whether it’s stocks, crypto, or forex—comes with high volatility.

Using only Buy/Sell orders may not be enough to manage risk. That’s why understanding and applying basic tools like Stop Loss (SL) and Take Profit (TP) is crucial. If the market moves against your prediction, SL and TP can act as supporting tools for your Buy/Sell orders—helping limit losses and secure profits automatically. They allow you to trade with greater confidence and discipline.

What Are SL and TP Orders?

SL (Stop Loss) – The Order That Limits Losses

A Stop Loss (SL) is a preset order you place before executing a Buy or Sell trade to limit potential losses. If the asset’s price moves in the opposite direction of your prediction, the SL order will automatically close your position when it reaches the set price.

Put simply, if you place a Buy order and the price drops, the SL will trigger at your predefined level to prevent further losses.

TP (Take Profit) – The Order That Locks in Profits

Take Profit (TP) is a preset order designed to automatically close your trade once your target profit level is reached. For example, if you place a Sell order and the price drops to your desired profit level, the TP will execute and secure your gains without manual intervention.

Both SL and TP orders help manage risk by ensuring that your trade is automatically closed when the market moves against your expectation—or in your favor—without needing to monitor the charts constantly.¹

Why Setting Stop Loss and Take Profit Is So Important

There are several key reasons why setting Stop Loss and Take Profit levels is critical in both asset trading and overall trading strategy:

• It helps you make decisions based on your trading plan, rather than reacting emotionally out of fear or greed.

• Using an SL to limit losses protects your account from major damage caused by sudden market volatility.

• Setting SL/TP enforces trading discipline, keeping you aligned with the strategy you originally planned.

Read more: 10 Common Mistakes Beginner Investors and Traders Often Make

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How to Set Stop Loss/Take Profit with Buy/Sell Orders

Setting a Stop Loss (SL) and Take Profit (TP) alongside your Buy or Sell order is simple. Most trading platforms—like IUX—allow you to add SL/TP levels right when you're placing a new trade.

• As you select Buy or Sell, you’ll see input fields where you can enter your desired Stop Loss (SL) and Take Profit (TP) values before confirming the order.
• Whether you're using a Market Order (executing at the current market price) or a Pending Order (such as a Buy Limit or Sell Stop), you can apply SL/TP settings at the same time.
• The SL/TP levels you set should align with your trading strategy and the timeframe you’re operating in to make them truly effective.

Find out how to set Pending Order (Buy Limit / Sell Stop) here

Examples of Proper Stop Loss/Take Profit Placement

Setting SL/TP should be based on analysis—not guesswork. Here’s how to do it right:

• Buy Scenario

If you decide to Buy an asset, place your Stop Loss slightly below a key support level to allow for short-term price swings. If the price breaks through this support, it could signal a trend reversal. Your Take Profit should be set near a resistance level that you expect the price to reach.

• Sell Scenario

If you're Selling, your Stop Loss should be slightly above a key resistance level, while the Take Profit should be placed near a support zone where you anticipate the price might fall.

• Use Technical Analysis

Good SL/TP placement should be backed by chart analysis—such as identifying support/resistance levels and overall price trends.

• Adjust Your Risk-to-Reward Ratio

New traders should start with a risk-to-reward ratio of 1:2. This means for every $1 you're willing to risk, aim for a $2 profit. For example, if you’re okay with a $100 loss, set your profit target at $200. Even if you don’t win every trade, this structure helps you stay profitable in the long run.

Learn More: What Are Leverage and Margin?

Pros and Cons of Stop Loss (SL) and Take Profit (TP)

Pros:

• Limits losses to a level you’re comfortable with

• Secures profits at your target level before the market reverses

• Reduces emotional decision-making while trading

• Allows you to trade without watching the screen 24/7

Cons:

• In highly volatile markets, your SL might get triggered before the price moves back in your favor

• If your TP is set too close, you might miss out on larger profits from extended price moves

• Requires careful analysis and planning of entry and exit points to be effective

Frequently Asked Questions About SL/TP

Q: How many pips should beginners set for SL/TP?
A: There’s no fixed number—it depends on the asset’s volatility, your trading timeframe, and your strategy. A good starting point is to place SL/TP around clearly visible support and resistance levels.

Q: Can I use SL/TP with Pending Orders?
A: Absolutely. You can set SL/TP with both Market Orders and Pending Orders (such as Buy Limit, Sell Stop, Buy Stop, and Sell Limit).

Q: How do I know if my TP is set too far?
A: If your TP is too far from the entry point, the price may never reach it. Check the next key resistance level or use tools like Fibonacci retracement to identify realistic targets. Also, make sure your Risk:Reward ratio remains reasonable.

How Should Beginners Start Setting SL/TP?

For beginners, setting Stop Loss and Take Profit alongside Buy/Sell orders is easier than it seems. Here’s how to get started:

• Start with a 1:2 Risk-to-Reward Ratio: Always aim for a profit target that’s twice the amount of risk you’re willing to take.
• Use Support and Resistance Levels: Set your SL/TP based on clear chart points like key support and resistance zones.
• Apply SL/TP with Every Buy/Sell Order: Build strong trading discipline by using SL/TP consistently to manage risk in every position you open.

Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.