What Are Take-Profit and Stop-Loss Orders and How Do They Work?

Take-Profit (TP) and Stop-Loss (SL) orders are essential risk management tools that allow traders to set predetermined conditions for closing a trade. With them, you can specify price levels at which your position will be automatically closed: a Take-Profit order locks in profits when the market reaches your target price, while a Stop-Loss order limits potential losses if the market moves against you.

These orders promote disciplined trading, reduce emotional stress, and help protect capital from sudden market fluctuations. Each has its own advantages and limitations, so it's crucial to understand their purpose and use them together for effective risk control. In the following sections, we will explore in detail how they work and why they play such a vital role in trading.

What is a Take-Profit Order?

A Take-Profit order is a limit order that pre-sets a price to close a trade for a profit. Once this level is reached, the platform automatically secures the result; if the price fails to reach it, the order remains inactive.

Most often, a take-profit is used with a stop-loss to balance risk and reward. For example, if an asset's price rises to the target, the system will close the trade in profit. If it falls, the stop-loss will trigger to limit losses. The ratio between the entry, stop, and take-profit defines the risk-to-reward. For instance, if you expect a 20% gain, you might set a take-profit at +20% and a stop-loss at –5%. This setup creates a 1:4 ratio and enables disciplined, emotion-free trading.

What is a Stop-Loss Order?

A Stop-Loss order—also known as a stop order—is designed to protect your capital by limiting the size of a loss or locking in a portion of the gains on a position that is already in profit.

When you set a stop-loss, you instruct the platform to automatically close your position if the asset’s price reaches a level you’ve chosen in advance. Depending on whether you have a long or short position, the platform will either sell or buy the asset at the market price to close the trade once the stop price is hit.

For example, suppose you buy a stock and set a stop-loss 5% below your entry point. If the stock drops by that amount, the stop-loss will trigger, and the system will sell your position at the best available price.

Why Are Stop-Loss and Take-Profit Orders Important?

Stop-loss and take-profit orders help a trader pre-define loss limits and profit targets, transforming trading from an emotional activity into a structured one.

A stop-loss protects capital: the trade closes upon reaching a set loss level, preventing catastrophic drawdowns and removing the need to constantly watch the chart.

A take-profit secures the result by closing a position when the target is met, thereby protecting the profit from a market reversal. Together, these orders create balance—one limits losses, the other locks in gains. 

This is the foundation of disciplined trading, where the risk-to-reward ratio is clear even before entering a trade.

Advantages of Using Stop-Loss Orders

The primary value of a stop-loss is capital protection. A trader pre-sets an acceptable loss level, and when it's reached, the trade closes automatically, preventing losses from escalating. This approach builds discipline and reduces the influence of emotions during market volatility. Another benefit is stress reduction. There's no need to constantly monitor the chart: the order will trigger on its own, freeing up time for analysis and well-considered decisions.

Advantages of Using Take-Profit Orders

Take-Profit orders offer the opposite but equally important benefit: they secure profits. Instead of letting a winning trade turn into a missed opportunity, the order automatically closes the position when the market hits a predetermined profit level. This removes the temptation to stay in a trade too long hoping for more gains, only to watch the market reverse and erase your profits.

Furthermore, take-profit orders help traders plan their risk-to-reward ratios clearly. By setting an exact price at which they want to exit, traders define the trade’s objective and can align it with their broader strategy. This planning creates consistency and removes guesswork, turning random market moves into controlled scenarios with predictable outcomes.

How to Set Stop-Loss and Take-Profit Orders

Setting a stop-loss and take-profit on a trading platform is simple, but choosing the levels requires strategy. A trader pre-defines the price at which they are willing to close a trade at a loss or a profit. A stop-loss limits risk: if the market moves against the position, the trade closes automatically. A take-profit works in reverse—it locks in gains upon reaching a target level and protects the profit from a market reversal. Both orders can be easily added in the trade window: simply specify the desired values when opening or editing a position, and the platform will execute them when the price is reached.

Placing a Stop-Loss Order on the Platform

On most platforms, a stop-loss is set directly in the order ticket when opening a trade. You just need to specify the price at which the position should close if the market moves against you. For example, if you buy a stock at $100 and are willing to risk 5%, the stop can be placed at $95. When this level is reached, the trade will automatically close at the available price. After opening a position, the stop-loss can be easily adjusted: many platforms allow you to drag it on the chart or change it manually in the order settings. This is convenient for adapting your strategy and maintaining control over risks.

Placing a Take-Profit Order on the Platform

A take-profit order is placed in the same way, but in the direction of profit. In the order ticket, a trader specifies the price at which they want to close the position once the market moves in their favor. For instance, if a stock was bought at $100 and the trader is targeting a 15% profit, the take-profit would be set at $115. When the price reaches this level, the system automatically executes the order, ensuring the profit is secured.

Like stop-loss levels, take-profit levels can be adjusted later. Some traders modify their targets as the market evolves, while others keep them fixed to maintain discipline. Either way, the order removes uncertainty by ensuring profits are locked in without the need for constant monitoring.

Methods for Calculating Stop-Loss and Take-Profit

There is no one-size-fits-all formula for setting stop-loss and take-profit orders. Traders use different methods depending on their strategy, trading style, and risk tolerance. Three of the most common approaches include support and resistance levels, moving averages, and fixed percentages of the price or capital.

Using Support and Resistance Levels

A reliable way to place orders is to focus on key chart zones. Support shows where the price typically finds buyers, while resistance indicates where the asset meets sellers. When buying, a stop-loss is placed just below a support level to limit losses, and a take-profit is set slightly below a resistance level to lock in profits before a potential reversal. This method is based on technical analysis and is effective in markets with clear ranges.

Using Moving Averages

Another method is to calculate stop-loss and take-profit levels based on moving averages. These averages smooth out price data and help identify the overall trend. A trader might, for example, use a 50-day moving average as a guide. If they open a long position, the stop-loss could be placed just below the moving average, while the take-profit is set at a level consistent with a potential trend continuation.

This approach is adaptive to market dynamics, as moving averages shift as new price data comes in. It is often used by trend-following traders who want their stops and take-profits to align with the prevailing market direction rather than static price levels.

Using Percentage-Based Calculations

The percentage method is simple and straightforward, making it popular with beginners. A trader pre-defines what portion of their capital they are willing to risk. For example, a trader with a $1000 deposit who risks 2% per trade defines a maximum acceptable loss of $20. Accordingly, their take-profit could be set to target a profit of 40-60, which establishes a risk-to-reward ratio of 1:2 or 1:3. This approach enforces discipline: every trade follows the same risk management rules, regardless of market fluctuations.

Types of Stop Orders

Stop orders come in several types, each designed for different trading situations. While they all aim to protect a trader from excessive losses or automate trade execution, their functionality can differ. Understanding these types helps traders choose the most suitable tool for their strategy.

Sell Stop Order

A sell stop order is triggered when the market price falls to or below your specified stop-loss level. Once activated, it becomes a market order and sells the asset at the best price it can find. Traders holding long positions often use this type of stop order to minimize their losses if the market starts to decline. If you buy a stock for $100 and set a sell stop order at $95, the trade will automatically close if the price drops to that level, helping you avoid further losses.

Stop-Limit Order

A stop-limit order adds more control by combining two conditions: a stop price and a limit price. Once the stop level is reached, the order becomes a limit order rather than a market order. This means the position will only be closed at the specified limit price or better. While this gives the trader more certainty over the execution price, it comes with the risk that the order may not be filled if the market moves past the limit too quickly. Stop-limit orders are useful when slippage is a concern, but they require careful monitoring of market conditions.

Trailing Stop Orders

A trailing stop is more flexible than a standard stop-loss. Instead of remaining fixed, the stop level moves with the market as long as the trade is profitable. For example, if you set a trailing stop 5% below the market price on a long position, the stop will automatically rise as the asset’s price increases, always maintaining that 5% gap. If the price reverses, the stop stays in place and will trigger once the decline reaches the set distance. This allows traders to lock in profits as the market moves in their favor without needing to manually adjust the stop-loss constantly.

Mistakes When Setting Stop-Loss and Take-Profit Orders

Although stop-loss and take-profit orders are simple in concept, many traders use them incorrectly. Mistakes in placing or managing these orders can lead to missed opportunities or unexpected losses. Understanding why orders sometimes fail to execute and which errors are most common helps avoid frustration and improve long-term results.

Why Might Orders Not Trigger?

There are situations where a stop-loss or take-profit order doesn't execute exactly as expected. One reason is market gaps, where the price jumps over the selected level due to sudden news or low liquidity. In such cases, the order may be filled at the next available price, which could be worse than planned. Another issue arises with stop-limit orders: if the market moves past the limit price too quickly, the order might not be executed at all. Technical errors, like entering the wrong value or forgetting to confirm an order, can also lead to a trade remaining open when it should have closed.

Common Trader Mistakes

Beginners often place their stop-loss too close to the entry price, causing the trade to be closed by normal market fluctuations. The other extreme is setting stops or take-profits too far away, which the market never reaches. It's also a mistake to refuse to adjust levels when the situation changes. The most dangerous error is removing a stop-loss under emotional pressure, which leads to major losses.

Conclusion: The Importance of Stop-Losses and Take-Profits in Trading

Stop-loss and take-profit orders are the foundation of disciplined trading. The first limits losses, the second secures profits, and together they create a clear risk profile for every trade. To ignore these tools is to turn trading into a gamble where decisions are driven by emotions. Using stop-losses and take-profits reduces stress, adds structure, and helps build consistent results. For any trader, their use is not a choice but a necessity.