What are stop loss and take profit?
Stop loss and take profit are the two exit levels most traders set before they enter a position. A stop loss closes the trade if price moves against you to a level where your idea is wrong. A take profit (also called a profit target) closes the trade when price reaches the reward you planned. Together they define the full range of a trade before it starts.
Setting both levels in advance turns an open-ended position into a defined plan: you know the maximum loss you intend to accept, the gain you aim to capture, and the ratio between them.
Stop loss meaning vs take profit meaning
| Idea | Stop loss | Take profit |
|---|---|---|
| Where it sits (long) | Below entry | Above entry |
| Where it sits (short) | Above entry | Below entry |
| Main job | Cap the loss when the trade idea fails | Lock in the planned gain |
| Typical order type | Stop order (becomes market when triggered) or stop-limit | Limit order at the target price |
| Fill risk | Can slip past the stop in gaps or fast markets | May not fill if price only touches the level briefly |
A stock stop loss order is protective; a take profit order is opportunistic. Neither predicts where price will go—they only decide what you do when it gets there.
How to set stop loss and take profit levels
- Start with invalidation. Place the stop loss where your setup is clearly wrong—below support, beyond a recent swing, or a multiple of ATR (average true range)—not at a random round number.
- Size the position from the stop. Decide how much of the account you will risk (for example 1%), then divide that amount by the distance from entry to stop to get share or contract size. This is what a stop loss calculator does.
- Set the take profit from structure and reward. Use a resistance level, a measured move, or a multiple of your risk (an "R multiple") to place the target.
- Check the risk reward ratio. If the target is not meaningfully farther than the stop, the trade may not be worth taking.
- Link the two exits. When one exit fills, the other should be canceled. Brokers call this a bracket order or OCO (one-cancels-other).
Risk reward ratio for stop loss and take profit
The risk reward ratio compares the distance to the take profit with the distance to the stop loss. A 2:1 ratio means the target is twice as far as the stop. The ratio sets the win rate you need to break even before costs:
| Reward : risk | Break-even win rate (before costs) |
|---|---|
| 1 : 1 | 50% |
| 2 : 1 | about 33% |
| 3 : 1 | 25% |
A higher ratio is not automatically better: distant targets fill less often. Backtesting tells you whether a given pairing actually fits a strategy.
Worked fictional example
These numbers are illustrative only. They are not a quote, signal, or forecast:
| Field | Example value |
|---|---|
| Account | $20,000 (fictional), risking 1% = $200 per trade |
| Entry | Long XYZ at $40.00 (fictional symbol) |
| Stop loss | $38.00 (below recent support) → $2.00 risk per share |
| Position size | $200 ÷ $2.00 = 100 shares |
| Take profit | $44.00 → $4.00 reward per share (2:1) |
| Outcomes | Stop fills: about −$200 plus any slippage. Target fills: about +$400. |
Common stop loss and take profit mistakes
- Stops inside normal noise. A stop tighter than typical bar-to-bar movement gets hit by randomness, not by a failed setup.
- Moving the stop farther away. Widening a stop after entry raises the loss you agreed to accept.
- Unlinked exits. If the stop and target are not one-cancels-other, a filled target can leave a live stop that opens an unwanted position.
- Targets with no basis. A take profit should come from structure or a planned R multiple, not hope.
- Assuming exact fills. Stops can slip in gaps; limit targets can be skipped. Plan for both.
If you want the stop to follow price instead of staying fixed, see how to set a trailing stop loss.
Checklist before you enter
- Stop loss placed at invalidation, not at an arbitrary percentage.
- Position sized from the stop distance and your per-trade risk.
- Take profit placed from structure or an R multiple.
- Risk reward ratio checked against the win rate the strategy can realistically reach.
- Exits linked so one cancels the other.
- Pairing tested in a backtest or practice account before real capital.
How Investfly fits
On Investfly, a strategy's Exit Plan can hold both exits at once: an Initial Stop (Fixed or Trailing) and a Take Profit target ladder that can close all of a position at one target or parts of it at several. Targets can be expressed as percent gain, price, P&L, ticks, points, pips, or an R multiple, and the Target + Stop recipe sets up the classic pairing in one step. You can backtest the strategy to see how a given stop and target pairing would have behaved, then rehearse it in a virtual portfolio before connecting a broker. Broker-native protective order support varies by broker and asset, and simulated results are not the same as live fills. To build the rules, start with how to create a trading strategy or the no-code trading bot overview.
Create your free account