Stop loss and take profit: what they are and how to set them sensibly
The stop loss is the order that closes your trade when it goes wrong, and the take profit is the one that closes it when it goes right. Setting them before you enter forces you to decide, with a cool head, how much you’re willing to lose and what you expect to make, instead of deciding with the price running against you.
By Bárbara Ruiz·Updated ·4 min read
What each one does
A stop loss and a take profit are orders you leave on the exchange so that it closes the position for you: the stop loss, when the price moves against you to the level you choose; the take profit, when it reaches your target.
- Stop loss: closes the position if the price reaches a level against you. If you’re long, it goes below the entry; if you’re short, above it.
- Take profit: closes the position if the price reaches your target. In a long, above the entry; in a short, below it.
Both wait on the exchange and execute even when you’re not watching. That’s the whole point: the crypto market never closes, and you have to sleep.
Stop market or stop limit
A stop market always gets you out, even at a somewhat worse price; a stop limit never exits worse than your limit, but it can stay unfilled if the price jumps. When the price touches the trigger level, the stop sends an order of one of these two types:
| Stop market | Stop limit | |
|---|---|---|
| What it sends | A market order | A limit order at a price you set |
| Is it sure to execute? | Yes | No: if the price jumps past your limit, it stays unfilled |
| Exit price | Can be worse than the level (slippage) | Never worse than your limit |
To cut losses, what matters is getting out. A stop limit that doesn’t execute in a sharp drop leaves you in the trade just when it does the most damage.
Where to set the stop
The most common mistake is setting it at a fixed percentage (“always at 2%”) or wherever it hurts least. The stop goes at the price that proves you were wrong: below the last relevant low if you go long, above the last relevant high if you go short, or where the structure that made you enter breaks.
Once you know where the stop goes, you calculate the position size so that, if it’s hit, you lose what you decided to risk. That’s the right order, and it’s explained in how much to risk per trade. And with leverage, the stop must always sit before the liquidation price.
The risk/reward ratio
Compare what you risk down to the stop with what you’re aiming for up to the take profit. Entry at 60,000 USDT, stop at 58,800 (2% below) and take profit at 63,600 (6% above): you risk 2 to make 6, a ratio of 1:3.
The ratio decides what percentage of winning trades you need so as not to lose money. The formula is 1 / (1 + ratio):
| Ratio | Win rate you need to break even |
|---|---|
| 1:1 | 50% |
| 1:2 | 33% |
| 1:3 | 25% |
| 1:4 | 20% |
That leaves fees aside: with them, you need a little more. A high ratio doesn’t make a trade good on its own: a very distant take profit is reached less often.
Mistakes that cost money
The costliest mistakes with the stop loss and the take profit aren’t about calculation but discipline: moving the stop further away as the price gets close, not setting one, placing it where everyone else does or moving the target out of greed.
- Moving the stop further away as the price gets close. You turn a small, planned loss into a big one.
- Setting the stop right on a round number or right at the low, where everyone else has theirs: that’s where stops get swept the most.
- Not setting one because you plan to “keep an eye on it”. A move that takes seconds won’t wait for you.
- Moving the take profit out of greed and watching the price turn around.
Frequently asked questions
What is a stop loss?
An order that automatically closes your position if the price reaches a level against you, to limit the loss.
What is a take profit?
An order that automatically closes your position when the price reaches your target, to lock in the gain.
Where should the stop loss go?
At the price that proves your idea was wrong, for example below the last relevant low in a long. Then you adjust the position size to that distance.
Why does the stop get hit and then the price moves your way?
It often happens when the stop is in an obvious spot, such as just below a low or on a round number. It doesn’t mean the stop was unnecessary: it means that where it goes and the position size are decided together.