How do stop loss and take profit work in trading

Stop loss and take profit are two essential tools that every trader should know. They are automatic orders that allow you to close a position at predetermined prices: take profit secures your gains when the price moves in your favor, while stop loss limits losses when things go in the opposite direction. Essentially, you set your preferred price levels, and the system will automatically execute the order once the market reaches that quote.

Protecting Your Gains: The Role of Take Profit

Imagine you’ve opened a short position on an asset, and the price starts to decline as you predicted. Without a take profit, you would need to constantly monitor the screen to close at the right moment. With a configured take profit, as soon as the price drops to the level you anticipated, your order activates automatically, and your profits are secured.

Take profit is especially useful if you want to capitalize on strong price movements without being connected in real time. You can set your target price and focus on other tasks, knowing that when the time comes, your profit will be locked in.

Limiting Losses: Stop Loss as a Defense Tool

Now, let’s consider the other side. Suppose you’ve opened a long position, but the market moves against you. Without protection, you could keep losing more while waiting for the price to bounce back. Stop loss intervenes in this situation by automatically closing your position at a maximum loss price you’ve predefined.

This is crucial for managing risks in a volatile market. Stop loss prevents you from losing more than necessary and shields you from sudden negative surprises. Many experienced traders consider stop loss non-negotiable in any trading strategy.

Setting Orders: What to Consider

When deciding to set up stop loss and take profit, you should know that there are two types of orders: stop orders and reference orders. The main difference is that reference orders do not lock your margin or existing open positions, whereas stop orders do.

Here are key points to remember:

• If the market price does not reach the level you set, the order simply will not activate. Your position remains open until something different happens.

• Once the order is executed, your current position will close. Or, if your order is structured differently, it might open a new position. The margin you reserved will become available again.

• If the price you set triggers a predefined system limit rule, the order will be placed at the most favorable limit price available at that moment.

When Your Orders Might Not Activate

Not everything always goes as planned. There are situations where stop loss and take profit might not work immediately or could fail entirely.

One common scenario is when the market moves very quickly. During a sharp fluctuation, your order might not be executed at the exact price you set because the system uses the available market price at activation. If the movement is too fast, the price could jump directly past your level.

Another situation to consider: if you have orders in opposite directions (excluding reduce-only orders) in your list, these could open a new position after your stop loss or take profit is triggered. In this case, margin checks might fail, and the order would not be completed.

Additionally, if the total amount of your stop loss and take profit orders exceeds the platform’s maximum limit, the operation will fail. In such cases, you can always choose to manually close a specific position if you’re in a hurry.

Conclusion

Stop loss and take profit are essential tools for anyone who wants to trade consciously and safely. Take profit helps you capture gains when things go well, while stop loss protects you when the market moves against you. Properly configuring them is crucial, but always remember that markets can be unpredictable, and risk is inherent in trading.