Stop Loss (SL)

Stop Loss (SL) and Take Profit (TP) orders are essential tools used to manage risk and lock in profits during trading.

Key Definitions

  • Take Profit (TP): A pending order that automatically closes a profitable position when a predefined target price is reached, effectively locking in gains.
  • Stop Loss (SL): A predefined price level on a chart that automatically closes a losing position. Its primary purpose is to minimize loss on a position. Stop Loss is often abbreviated as SL.

Stop Loss in Practice

Case 1: Entering a Buy Position

  1. A trader enters a buy position, expecting prices to rally higher.
  2. Recognizing that the market may move unpredictably, the trader calculates risk and places a Stop Loss order below the entry price.
  3. If the bid price subsequently hits the predefined Stop Loss price, the position is automatically closed, ensuring only a minimum, calculated loss is incurred.

Case 2: Entering a Sell Short Position

  1. A trader enters a sell short position, expecting prices to fall.
  2. The trader places a protective Stop Loss order at a price higher than the entry price.
  3. If the ask price hits the predefined Stop Loss price, the position is automatically closed, minimizing the potential loss resulting from an unexpected price spike.

Order Execution Methods

  • Instant Execution Accounts: Stop Loss and/or Take Profit orders may be placed simultaneously when initiating a trade at market price.
  • Market Execution Accounts: Traders can specify a Stop Loss or Take Profit order when placing a pending order to enter the market at a future price.

Both Stop Loss and Take Profit are crucial elements of effective risk management.


Detailed Summary

Stop Loss (SL) and Take Profit (TP) orders are critical risk management tools in trading. The Take Profit (TP) order automatically closes a profitable position upon reaching a target price, securing gains. The Stop Loss (SL) order automatically closes a losing position when a predefined price level is hit, serving to minimize potential losses. SL placement varies based on the trade direction: for a buy position, SL is placed below the entry price, and for a sell short position, SL is placed above the entry price. These protective orders can be placed simultaneously with trade initiation in Instant Execution Accounts, or when setting pending orders in Market Execution Accounts.

Key Takeaways

  • Stop Loss (SL) and Take Profit (TP) are essential for risk management in trading.
  • A TP order locks in profits by automatically closing a profitable trade at a target price.
  • An SL order minimizes losses by automatically closing a losing position at a predefined price level.
  • For a buy position, the SL is placed below the entry price.
  • For a sell short position, the SL is placed above the entry price.
  • In Instant Execution Accounts, SL/TP can be placed when initiating the trade at market price.
  • In Market Execution Accounts, SL/TP can be specified when placing a pending order.