Stop-Loss (SL) and Take-Profit (TP)
Set your exit plan when you open the trade: where you admit you're wrong and where you take the win, measuring risk and reward in pips.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Forex: Pending Orders & Risk, lesson 7: “Stop-Loss (SL) and Take-Profit (TP)”
Set your exit plan when you open the trade: where you admit you're wrong and where you take the win, measuring risk and reward in pips.
Measure risk and reward in pips
Set your SL and TP when you open. The distance to SL is your risk and the distance to TP is your reward, both measured in pips.
Whichever line is touched first decides the outcome
Once SL or TP is hit, the position is closed. Even if price then shoots to the moon, it has nothing to do with this trade.
The risk/reward ratio sets the win rate you need
A risk/reward ratio of 1:2 means risking 30 pips to make 60. Ignoring costs, a win rate above about 33% keeps you from losing over time; at 1:1 you need more than 50%.
Key takeaways
- SL (stop-loss) caps your maximum loss; TP (take-profit) locks in your target profit.
- When long, the SL goes below and the TP above; when short, the reverse.
- Once the SL or TP is hit, the position is closed, and whatever the market does next no longer affects you.
- With a 1:2 risk/reward ratio and ignoring costs, you need a long-run win rate above about 33% just to break even.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Default Buy 1.0850, SL 1.0820, TP 1.0910: how many pips are the risk and reward on the right?
- Pick "Dip, then bounce" and play: price first falls to 1.0820, then rises past 1.0910. What's the final result?
- Switch to Sell: which side of the entry price do SL and TP move to?
- Drag TP to 90 pips, keep SL at 30 pips, and see what the risk/reward ratio becomes.
Quiz and explanations
- 1. You Buy at 1.0850 with SL 1.0820 and TP 1.0910. What are your risk and potential profit?
- Answer: 30 / 60 pips.1.0850 − 1.0820 = 30; 1.0910 − 1.0850 = 60.
- 2. Same trade. The price first falls to 1.0820, then rises to 1.0950. What's the result?
- Answer: Stopped out, −30 pips; the later rally doesn't affect you.The SL was hit first, so the position was already closed.
- 3. You Sell at 1.0850 with SL 1.0880 and TP 1.0790, trading 1 lot ($10 per pip). What are your maximum loss and target profit?
- Answer: $300 / $600.For a short the SL is 30 pips above = $300, and the TP is 60 pips below = $600.
Terms in this lesson
- pip (Pip): The smallest standard price unit in forex; for EUR/USD, 1 pip = 0.0001.
- risk/reward ratio (Risk : Reward): Money you could lose : money you could make; 1:2 means risking $1 to aim for $2.
- stop-loss (Stop Loss): Automatically closes a position when price moves against you to a preset level, capping your maximum loss.
- take-profit (Take Profit): Automatically closes a position when price reaches your preset target, locking in the profit.