Stop-loss and take-profit orders are essential risk management tools. Without them, you’re gambling, not trading.
Types of Stop-Loss Orders
| Type | How It Works | Best For |
|---|---|---|
| Market stop-loss | Triggers a market sell at current price | Fast exits |
| Limit stop-loss | Triggers a limit order at specified price | Avoiding slippage |
| Trailing stop-loss | Moves up as price rises | Trend following |
| Time-based stop | Exits after set time period | Day trading |
Where to Place Stop-Loss
| Method | Description |
|---|---|
| Below support | Place just below a known support level |
| Below recent low | Place below the most recent swing low |
| Technical level | Below moving average, trendline, or Fib level |
| Fixed percentage | 2-5% below entry (simple but less precise) |
| ATR-based | Below entry minus 1.5-2× ATR |
The 1% Rule
Never risk more than 1% of your trading capital on a single trade.
| Account Size | Max Risk per Trade |
|---|---|
| £1,000 | £10 |
| £5,000 | £50 |
| £10,000 | £100 |
| £50,000 | £500 |
Position Sizing with Stop-Loss
Calculate your position size:
Position size = (Account × Risk %) / (Entry - Stop loss)
Example:
- Account: £10,000
- Risk: 1% = £100
- Entry: £50
- Stop loss: £48
- Position size = £100 / (£50 - £48) = 50 units = £2,500
Take-Profit Strategies
| Strategy | Description |
|---|---|
| Fixed risk/reward | 1:2 or 1:3 reward-to-risk ratio |
| Resistance level | Take profit at known resistance |
| Fibonacci extension | Take profit at 161.8% extension |
| Trailing take-profit | Let profit run until trend reverses |
| Partial takes | Take 50% at target, let 50% run |
Risk/Reward Ratio
| Ratio | Win Rate Needed | Verdict |
|---|---|---|
| 1:1 | 50% | Break even (before fees) |
| 1:2 | 33.3% | Profitable |
| 1:3 | 25% | Profitable |
| 1:5 | 16.7% | Profitable |
A 1:2 risk/reward with a 40% win rate is highly profitable.
Common Mistakes
| Mistake | Why It’s Bad |
|---|---|
| No stop-loss | One bad trade wipes out gains |
| Stop too tight | Gets stopped out by normal volatility |
| Moving stop wider | Defeats the purpose |
| Not adjusting in profit | Lets winners become losers |
| Too many partial takes | Caps upside |
Trailing Stop Example
- Buy at $100
- Set trailing stop at 5%
- Price rises to $120 — stop moves to $114
- Price rises to $130 — stop moves to $123.50
- Price drops to $123.50 — stop triggers
- Profit locked: $23.50/share (23.5% gain)
Bottom Line
A stop-loss is non-negotiable. Determine your stop placement before entering a trade, calculate position size based on risk, and set a take-profit at a level with a favorable risk/reward ratio. The best traders focus on risk management first, profits second.