Free Trading School · Level 5: Placing Smart Trades
Stop-loss and take-profit
A stop-loss is a pre-set order that closes your trade at a loss if price reaches a level that proves your idea wrong. It is not a sign of weakness; it is the reason you can survive being wrong, which you will be often.
Where to put the stop
- Beyond the level that defines the setup: below the support you bought, or above the resistance you sold.
- Far enough to avoid normal noise. A volatility measure like the ATR helps.
- Never based on how much you "feel like" losing. Decide the stop from the chart, then adjust the position size.
A take-profit order closes the trade at your target. Some traders take all the profit at one level; others take part of it and trail a stop behind the rest to catch bigger moves.
Never move a stop-loss further away to avoid being stopped out. That is how small losses become account-ending ones.
Your stop goes where your idea is wrong. Your position size makes sure being wrong only costs a small, planned amount.
Quick answers
A stop-loss is a pre-set order that closes your trade at a loss if price reaches a level that proves your idea wrong. It is not a sign of weakness; it is the reason you can survive being wrong, which you will be often.
Your stop goes where your idea is wrong. Your position size makes sure being wrong only costs a small, planned amount.
Where your trade idea is proven wrong. The stop belongs at the level that invalidates the setup.
Next lesson: The risk-reward ratio