What is a stop loss order?
A stop loss is not an option, it is a necessity for leveraged trading. Without one, a sudden adverse move in a leveraged product can result in losses significantly exceeding your initial deposit. The stop loss price is the level at which your trade is closed; once the market reaches that price, the order converts to a market order and executes at the best available price. In fast-moving markets, this can result in execution slightly worse than the stop price, a phenomenon called slippage.
What is a take profit order?
A take profit order, also called a limit closing order, automatically closes your position when the market reaches your specified profit target. Where a stop loss protects against loss, a take profit captures a planned gain. Setting a take profit disciplines you to bank profits at a pre-determined level rather than holding a position indefinitely out of greed or hoping for further gains.
Take profit orders are particularly useful for short-term traders in fast-moving markets like forex and indices, where positions can swing through profit targets quickly. A take profit executes automatically without requiring you to monitor the position continuously, reducing the temptation to move the target higher as the market approaches it.
Risk:reward ratio: the foundation of using stop losses and take profits together
The real power of using a stop loss and take profit together is that they define your trade's risk:reward ratio before you open. The risk:reward ratio compares the maximum amount you stand to lose (distance to stop loss) against the maximum amount you stand to gain (distance to take profit).
Risk:reward ratio formula:
Risk:reward = (entry price - stop loss level) / (take profit level - entry price)
Example: you buy EUR/USD at 1.0800, place a stop loss at 1.0770 (30 pips risk) and a take profit at 1.0860 (60 pips potential gain).
Risk:reward = 30 / 60 = 1:2. For every pound you risk, you stand to make two.
Most professional traders require a minimum 1:2 risk:reward ratio on any trade they take. This means that even if they are only right 40% of the time, their profitable trades cover their losses and generate a net profit. A 1:1 ratio requires you to be right more than 50% of the time just to break even after the spread costs on each trade. The higher the risk:reward ratio you target, the fewer trades you need to win to remain profitable.
Types of stop loss order
Standard stop loss
The most basic stop loss. When the market reaches your stop price, the order becomes a market order and executes at the best available price. In liquid markets during normal conditions, execution is typically very close to your stop level. In fast markets, following major news releases or at market open after overnight gaps, slippage can be significant. Standard stop losses are free to use and are the most commonly used type.
Guaranteed stop loss
A guaranteed stop loss guarantees execution at your exact stop level regardless of market conditions, including gaps. You pay a small premium for this guarantee, but it eliminates the slippage risk entirely. Guaranteed stops are particularly valuable in highly volatile markets, before major economic announcements, or when holding positions overnight in markets prone to opening gaps. We offer guaranteed stops on eligible markets and they can be a particularly important risk management tool when trading leveraged products where losses can exceed your deposit without adequate protection.
Trailing stop loss
A trailing stop loss moves with the market as it moves in your favour, locking in an increasing portion of your profit while still leaving room for the trade to develop. If you set a trailing stop at 30 points below the current market price, and the market rises 50 points, your stop automatically moves up 50 points too. If the market then falls 30 points from its new high, the position closes, locking in a 20-point profit rather than the full 50 but also not giving back all gains if the market reverses further.
Trailing stops are particularly effective for trend-following strategies across forex trading and equity indices, where sustained directional moves are common. The key challenge is setting the trailing distance correctly: too tight and normal price volatility will trigger the stop prematurely; too loose and you give back too much profit before the position closes.
How to set stop loss and take profit levels
1. Use support and resistance levels
Support and resistance levels provide natural, market-validated reference points for stop losses and take profits. Placing a stop loss just below a support level for a long trade means your position is only closed if the market breaks decisively through a level that has previously held. A take profit set just below a resistance level captures the move you expect without risking that the position reverses at the resistance ceiling. These principles apply whether you are trading shares, gold or major currency pairs.
2. Account for the asset's average true range (ATR)
The Average True Range (ATR) measures how much a market typically moves in a given period. Setting a stop loss inside the ATR means normal price fluctuation can trigger it even if your overall direction is correct. A common approach is to place the stop loss at least one ATR below the entry for long positions, ensuring that only an abnormal adverse move closes the trade. ATR-based stops are especially useful for volatile markets like crypto CFDs and commodity futures.
3. Match stop distance to timeframe
A day trader entering on a 5-minute chart requires a much tighter stop loss (measuring intraday noise) than a swing trader entering on a daily chart (accommodating multi-day volatility). Mismatching the stop distance to the timeframe is one of the most common stop placement errors: using a 10-point stop loss in a market that moves 50 points in a normal session virtually guarantees being stopped out by normal price action before the trade has time to develop.
4. Align take profit with chart targets
Take profit targets should be set at technically meaningful levels, such as a previous high, the measured move of a chart pattern, or a key Fibonacci extension level. Setting a take profit at an arbitrary number ("I'll take 50 pips") without reference to where the market may encounter resistance means you may close a winning trade too early or hold it past a natural reversal point. Chart-based targets give you a rationale for each exit level.
Stop loss orders: advantages and disadvantages
Advantage | Disadvantage |
Limits maximum loss to a defined amount on every trade | Can be triggered by normal volatility before the trade has time to develop |
Removes the need to constantly monitor open positions | Standard stops can suffer slippage in fast markets or after overnight gaps |
Removes emotion from loss-cutting decisions | May close a profitable trend trade prematurely if set too tight |
Can be used to lock in profit as a trailing stop | No stop can protect against all scenarios, including exchange trading halts |
Take profit orders: advantages and disadvantages
Advantage | Disadvantage |
Locks in planned profits at the predetermined target | May close the position before the full move is captured if the market continues beyond the target |
Removes the temptation to hold too long out of greed | Once closed, you miss any further move in your favour |
Automated execution means profits are captured even when you are not watching | Not appropriate for all strategies; trend followers often prefer trailing stops over fixed targets |
Helps short-term traders manage exits at technically meaningful levels | Placing too close to entry means minor price movements can close the trade on normal volatility |
Stop loss and take profit FAQs
What is a stop loss order?
A stop loss order instructs your broker to automatically close a position if the market moves against you to a specified price level, limiting your maximum loss on the trade. Standard stops convert to market orders when triggered; guaranteed stops always execute at exactly your specified level for a small additional cost.
What is a take profit order?
A take profit order automatically closes your position when it reaches your specified profit target. Also known as a limit closing order, it ensures your planned gain is captured without requiring you to monitor the trade continuously. It executes when the market reaches the level at the most favourable price, closing for profit as intended.
What is a good risk:reward ratio?
Most professional traders target a minimum risk:reward ratio of 1:2, meaning they aim to make at least twice what they risk on each trade. At 1:2, you only need to be right on 34% of trades to break even (excluding spread costs), which gives considerable margin for the natural uncertainty of markets. Ratios below 1:1 are generally not sustainable over the long term.
What is the difference between a stop loss and a guaranteed stop loss?
A standard stop loss converts to a market order when triggered and may experience slippage in fast-moving markets. A guaranteed stop loss always executes at your exact specified price regardless of market conditions, including gaps. The guaranteed stop costs a small additional premium but eliminates slippage risk entirely. We offer guaranteed stops on eligible markets.
Can I use stop losses when investing in shares?
Yes. Stop losses are available on share positions held through spread betting and CFD accounts. For direct share ownership through a share dealing account, you can use limit orders to sell at a specified price, though guaranteed stops are a feature of leveraged accounts rather than direct investment accounts.