Stop loss and take profit
In the previous lesson, you learned how market, limit and stop orders work. This lesson explains how stop loss and take profit instructions can help you plan an exit before or after opening a position. You will also learn why these tools do not remove the risks of leveraged CFD trading.
Two ways to plan an exit
A stop loss is an instruction to close a position if the market reaches a specified price in an unfavourable direction. Its purpose is to limit the loss on that position, although the final execution price is not guaranteed. Setting a stop loss gives the trade a defined exit condition rather than leaving every decision until prices move.
A take profit is an instruction to close a position when the market reaches a specified price in a favourable direction. It allows you to set an exit target without watching the screen continuously. Neither instruction predicts what the market will do. Price may reach either level, or neither, while the position remains open.
Where the levels go
For a buy position, a loss-limiting stop loss is normally below the entry price, while a take profit is above it. For a sell position, the arrangement is reversed: the stop loss is above the entry price and the take profit is below it. These directions reflect whether rising or falling prices benefit the position.
These instructions are attached to a position; they are not the same as pending buy stop or sell stop orders used to open a trade. A stop loss can also be moved beyond the entry price after a favourable move to protect some gains, but it still cannot guarantee a particular result. Costs and execution differences may affect the final outcome.
Worked example: EURUSD
Consider a hypothetical buy position of 0.10 standard lots in EURUSD, opened at 1.1000. A standard lot is 100,000 units, so this position represents 10,000 euros. The stop loss is set at 1.0970 and the take profit at 1.1060. On EURUSD, one pip is 0.0001, making the distances 30 pips to the stop loss and 60 pips to the take profit.
One pip on EURUSD is worth USD 10 per standard lot, so at 0.10 lots it is worth USD 1. If execution occurs exactly at the chosen levels, the gross loss would be USD 30 or the gross profit USD 60. These figures exclude commissions, overnight financing and other applicable charges. The illustrative risk-to-reward ratio is 1:2; it says nothing about the probability of either outcome.
Why execution can differ
A stop loss is a trigger, not a guaranteed closing price. Once triggered, it generally leads to an order to close at an available market price. During rapid moves, limited liquidity or a price gap, execution may occur beyond the stop level. This difference is called slippage, and it can make the realised loss larger than the planned loss.
The bid and ask prices also matter. A buy position closes at the bid, while a sell position closes at the ask; these are generally the prices used to trigger their exits. A chart showing only one side may therefore appear not to have reached a level that was triggered. Take profit execution also depends on applicable order rules and market conditions.
Link exits to position size
A stop distance alone does not tell you how much money is at risk. Position size and the instrument’s value per point or pip are also needed. In the example, doubling the position to 0.20 lots would double the planned gross loss to USD 60 at the same stop level, assuming exact execution. Margin required to open a position is not the same as potential loss.
CFDs are leveraged products and carry a high risk of loss. Stop loss and take profit instructions can support a structured plan, but they do not eliminate that risk. In the next lesson, you will explore MT5, including where to enter and review these levels. A demo environment can help you practise checking trade direction, volume and exit prices without risking real money.
- Stop loss limits intended downside, but does not guarantee the exit price.
- Take profit sets a favourable exit level, not a guaranteed outcome.
- Stop distance and position size together determine planned monetary risk.
- Slippage, costs and leverage can affect the final result.