Stop loss and take profit
Word parts behind the two orders
A stop loss is two words joined into one instruction. Stop means close the position. Loss means the closing price is worse than the opening price. A take profit works the same way in the other direction. Take means close the position and keep the gain. Profit means the closing price is better than the opening price.
On a trading platform the two orders sit in the same ticket as the position itself. You will see fields labelled stop loss and take profit, often shortened to SL and TP. Each field takes a price, not a number of pips. The platform converts that price into pips for you. If you type a price that sits on the wrong side of the current market, the platform will refuse it.
The words describe what the order does, not what will happen. A stop loss does not stop a loss from existing. It fixes the size of the loss at the moment the order fills. A take profit does not promise a gain. It closes the position if the market reaches that price. If the market never reaches it, the order stays open and the position stays open with it.
Where the stop sits on the chart
A stop loss price is not chosen at random. It is placed where your reason for the trade would no longer hold. If you bought AUD/USD because a price level held, the stop goes below that level. If the level breaks, the idea is wrong and the position should close. The distance from entry to stop is the stop distance, measured in pips.
A take profit price is placed where the market has a reason to slow down. That might be a level that stopped price before, or a round number such as 0.6700. The distance from entry to take profit is the take profit distance. On AUD/USD around 0.6640, a move to 0.6700 is roughly 60 pips. A move to 0.6600 is roughly 40 pips.
The two distances are set by the chart, not by the money. This is the part that beginners reverse. They pick a pip distance that feels affordable, then look for a reason to justify it. The chart does not care what you can afford. It only shows where price has turned before. A stop placed for money reasons sits in the middle of nowhere and gets hit for no reason.
Turning pip distances into dollars
The pip value on AUD/USD depends on the position size. On 0.10 lots, one pip is about A$1. On 0.05 lots, one pip is about A$0.50. On 0.20 lots, one pip is about A$2. Those figures assume the account is in Australian dollars. If the account is in another currency, the platform converts the result and the number changes.
Once you know the pip value, the arithmetic is short. Stop distance in pips multiplied by pip value gives the loss at the stop. Take profit distance in pips multiplied by pip value gives the gain at the target. A 15 pip stop on 0.10 lots is 15 times A$1, which is A$15. A 60 pip target on the same size is 60 times A$1, which is A$60.
The ratio between the two distances is separate from the money. A 20 pip stop and a 40 pip target is a ratio of one to two. A 30 pip stop and a 30 pip target is one to one. The ratio tells you how often the target needs to be reached to cover the losses. It does not tell you whether the trade will work. No ratio and no order can promise that outcome.
Brokers round the pip value and quote their own prices. A spread or commission is charged on top, so the realised loss is slightly larger and the realised profit slightly smaller than the raw calculation. Those costs vary between brokers. Check them on the platform before you rely on any figure.
A 0.10 lot AUD/USD trade with a 20 pip stop and a 40 pip take
| Step | Amount | Note |
|---|---|---|
| Position size | 0.10 lots | One tenth of a standard lot. A standard lot is 100,000 units of the base currency. |
| Entry price | 0.6640 | The AUD/USD rate used in this example. |
| Value of one pip | A$1 | One pip on one standard lot is 10 units of the quote currency. On 0.10 lots that is 1 unit, which is A$1 when the quote currency is the Australian dollar. |
| Stop loss distance | 20 pips | The distance from entry to the stop price you set. |
| Loss at the stop | A$20 | 20 pips x A$1 per pip. |
| Take profit distance | 40 pips | The distance from entry to the take profit price you set. |
| Profit at the take profit | A$40 | 40 pips x A$1 per pip. |
The broker may round the pip value, quote a slightly different price, and charge a spread or commission on top. Those charges vary between brokers, so check the costs on the platform before you trade.
Doing it once, step by step
The walkthrough below sets a stop and a take profit on one AUD/USD position, in the order that keeps the risk under control. Follow the same order each time you open a trade.
- 01
Write down the loss you can accept
Choose an amount in dollars before you look at the chart. For this example the amount is A$30. That is the most the account can lose on the trade. It is not a target and it is not a prediction.
- 02
Mark the level that proves the idea wrong
On the AUD/USD chart around 0.6640, find the price where your reason for the trade fails. If you are buying, that level sits below the entry. Measure the distance from entry to that level in pips. Suppose it is 20 pips.
- 03
Divide the money by the distance
A$30 divided by 20 pips gives A$1.50 per pip. That is the pip value the position must have. It is the bridge between the money and the size.
- 04
Convert the pip value into lots
One pip on 0.10 lots is about A$1. To reach A$1.50 per pip you need 0.15 lots. Enter that size on the platform. The ticket should now show an estimated loss near A$30.
- 05
Place the take profit where the market may slow
Find a level above the entry where price has turned before, or a round number such as 0.6700. Measure the distance from entry in pips. If it is 60 pips, the gain on 0.15 lots is 60 times A$1.50, which is A$90.
- 06
Check the ticket before you open
Confirm the size, the stop price and the take profit price on one screen. Check that the estimated loss matches the amount you chose. Add the spread or commission if the platform shows it. If any figure is wrong, change it before the order is sent.
The mistake most people make here
The common mistake is choosing the stop distance first and the position size second. That reverses the order. If the stop is 20 pips and the loss you can accept is A$20, the position size must be 0.10 lots. If the stop is 40 pips, the same A$20 loss means 0.05 lots. Decide the money you are willing to lose, then set the stop where the chart says the idea is wrong, then work out the size. Many platforms let you enter the stop and the size together, so the A$ loss is shown before you open the trade.Check yourself
On 0.10 lots of AUD/USD, a stop loss is 15 pips away. What is the loss in A$?
One pip on 0.10 lots is A$1. 15 pips x A$1 = A$15.
On 0.10 lots of AUD/USD, a take profit is 60 pips away. What is the profit in A$?
One pip on 0.10 lots is A$1. 60 pips x A$1 = A$60.
You will accept a loss of A$30. The stop is 20 pips away. What position size keeps the loss at A$30?
A$30 / 20 pips = A$1.50 per pip. One pip on 0.10 lots is A$1, so A$1.50 per pip is 0.15 lots.
Questions that come up next
Where exactly do I type the stop loss price on the platform?
The stop loss and take profit fields sit in the order ticket, the same panel where you set the position size. Each field takes a price, not a pip count. The platform shows the equivalent pip distance beside it. If the price you type sits on the wrong side of the market, the platform refuses it. That refusal is a check, not an error in your account.
What happens if the market jumps past my stop loss price?
The order becomes a market order once the price is reached. It fills at the next available price, which can be worse than the price you set. This is called slippage. It happens most around news releases and at times when trading is thin. The loss can therefore be larger than the figure you worked out in advance.
Can I move the stop loss after the position opens?
Yes, most platforms let you change or remove both orders while the position is open. Moving a stop further away increases the loss you have accepted. Moving it closer locks in a smaller loss but gives the market less room. Some platforms let you trail the stop behind the price automatically. Check what your platform offers before relying on it.
Do I need both orders on every position?
No, each is optional and they are set separately. A position with no stop loss has no fixed limit on the loss. A position with no take profit stays open until you close it. Many beginners start with both attached so the outcome is decided before the trade opens. The choice is yours, and it can differ from trade to trade.
Does the spread change the distance to my stop loss?
The spread is the gap between the buy price and the sell price. It is already inside the price you see, so it affects where your position starts. On AUD/USD the spread is usually small, but it varies between brokers and around news. Commission, if charged, sits on top of the spread. Both are costs separate from the stop and take profit distances.
Why does my A$ loss differ slightly from the figure I calculated?
The pip value is an estimate because the exchange rate used to convert the profit or loss into Australian dollars moves too. Your broker may also round the pip value to a set number of decimal places. The price you actually get can differ from the price on screen by a small amount. Treat your calculated figure as close, not exact.
The words used on this page
- Stop loss
- An order that closes a position at a price you set in advance, below the entry for a buy and above it for a sell. It fixes the size of the loss when it fills. It does not prevent the loss from happening.
- Take profit
- An order that closes a position at a price you set in advance, in the direction that produces a gain. It closes the position only if the market reaches that price. If the market never gets there, the position stays open.
- Stop distance
- The gap in pips between the entry price and the stop loss price. It is set by where the chart says the trade idea is wrong, not by the money you can afford. The same gap produces different losses at different position sizes.
- Position size
- The amount of the instrument you hold, measured in lots. On AUD/USD, 0.10 lots gives a pip value of about A$1. Size is the number you adjust to fit a chosen loss, once the stop distance is fixed.
- Pip
- The smallest standard step in a currency price, usually the fourth decimal place. On AUD/USD around 0.6640, a move to 0.6641 is one pip. Pip value depends on position size and on the account currency.
- Slippage
- The difference between the price your order was set at and the price it actually filled at. It usually works against you and widens the loss beyond the planned figure. It is more common when prices move fast or trading is thin.
What to take away
- The stop loss and take profit are prices, not pip counts, and the platform turns them into pips for you.
- The chart sets the stop distance; the money you can accept sets the position size, in that order.
- On AUD/USD, one pip is about A$1 on 0.10 lots, so the loss is the pip distance times that figure.
- Spread, commission and slippage sit outside your calculation and vary between brokers, so check the platform before you trade.