What is a Stop-Loss and a Take Profit?

What is a Stop-Loss and a Take Profit

A Stop-Loss is an order placed to automatically close a position when the price moves against you by a certain amount. Its purpose is to limit potential losses on a trade. A Take Profit is an order set to automatically close a position when the price reaches a certain level of profit. It helps lock in gains without needing to monitor the trade constantly.

How Do They Work?

Stop-Loss: Closes your position when the price hits your set stop level to limit your loss.
Take Profit: Closes your position once your set profit target is reached.

Both orders are not guaranteed, meaning that during market gaps, or outside of regular trading hours (e.g., weekends), the price may move past your Stop-Loss or Take Profit level, potentially resulting in slippage. Once either is triggered, it turns into a market order and executes at the best available price, which can differ from your set level during illiquid times or high volatility events (like news releases).

How Stop-Loss and Take Profit Work For a Long Position (Buying)

Stop-Loss: When you're long, your Stop-Loss is triggered if the bid price hits your set level. This is because your position would close at the bid price, which is lower than your entry.

Take Profit: For a long position, your Take Profit is triggered when the ask price reaches your target, as that’s the price at which you would exit and lock in your profits.

Example:

You open a long position at 1.2000 (ask) with a Stop-Loss at 1.1900 (bid) and a Take Profit at 1.2100 (ask).

If the bid price reaches 1.1900, the Stop-Loss triggers, closing your position.
If the ask price reaches 1.2100, the Take Profit triggers, locking in your profit.

How Stop-Loss and Take Profit Work For a Short Position (Selling)

Stop-Loss: When you’re short, your Stop-Loss is triggered if the ask price hits your set level. This is because your position would be closed at the ask price, which is higher than your entry.

Take Profit: For a short position, your Take Profit is triggered when the bid price reaches your target, as that's the price at which you exit and realize your profits.

Example:

You open a short position at 1.2000 (bid) with a Stop-Loss at 1.2100 (ask) and a Take Profit at 1.1900 (bid).

If the ask price reaches 1.2100, your Stop-Loss triggers and closes your position.
If the bid price reaches 1.1900, your Take Profit triggers and locks in your profit.

What is a Stop-Loss and a Take Profit

How Do They Work?

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