What is a stop loss? Stop loss and take profit explained

Why every trade needs one

A stop loss decides the worst case before you enter. Without one, a trade that goes wrong has no end point. You’re left deciding under stress, and most people hold on, hoping it comes back.

Gold often moves $40 or more in a day, which is 400 pips, and far more around big news. With no stop and a position that’s too big, one bad day can take a large part of an account.

The stop does three jobs:

• It caps the loss. You know the most a trade can cost before you take it.
• It sets your position size. You can’t work out a lot size without knowing the stop. More in position size, step by step.
• It works when you’re not watching. It sits with your broker, so it closes the trade while you sleep, work or lose signal.

How a stop loss works

A stop loss sits on the opposite side of your entry.

You open a	Stop loss goes	Take profit goes
Buy	Below your entry	Above your entry
Sell	Above your entry	Below your entry

When price reaches your stop, the broker closes the trade at the next available price. In a calm market that’s at or very close to your level.

A stop loss is not the same as a stop order. A buy stop or sell stop opens a trade when price breaks a level. A stop loss closes one. See order types if those are new.

A worked gold example

You buy gold at 4030 with a stop loss at 4020 and a take profit at 4050. One pip on gold is a $0.10 move (what is a pip).

The stop is $10 away, which is 100 pips. The target is $20 away, 200 pips. What that means in money depends on your size:

Lot size	Stop hit (−100 pips)	Target hit (+200 pips)
0.01	−$10	+$20
0.05	−$50	+$100
0.10	−$100	+$200

Two things to notice:

1. The stop is the same distance whatever your size. Only the money changes. That’s why you set the stop first and then pick the lot size that turns 100 pips into an amount you can afford to lose.
2. The target is twice as far as the stop. Traders call that a reward-to-risk of 2 : 1, or a target of +2R. It doesn’t mean the trade will work. It means a win pays twice what a loss costs.

What a take profit does

A take profit closes the trade at your target, so a winning trade becomes a winning trade without you having to be there.

Trade ideas often list more than one target (TP1, TP2, TP3). How traders handle several targets, whether they close part of the trade along the way and when they move the stop, is part of trade management. That’s where styles differ most, so it belongs to whoever you learn from, not to a general lesson.

Why a stop can fill worse than your price

A stop loss guarantees the trade gets closed. It doesn’t guarantee the price.

Slippage. When your stop is hit, it turns into a market order. If price is moving fast, for example on a big US data release, the next available price can be a few pips past your level.

Gaps. Gold stops trading on Friday evening and reopens on Sunday evening (New York time). If news breaks over the weekend, Monday can open well away from Friday’s close. Say gold closed at 4022 and opens at 4012. Your stop at 4020 never had a chance: it fills at about 4012, a loss of 180 pips instead of 100. At 0.05 lots that’s $90, not $50. See gold trading hours.

Some brokers offer a guaranteed stop loss, which fills at your exact level whatever happens, usually for an extra fee. Check what yours offers before you rely on it.

The spread can trigger your stop

Charts usually show the bid price. But a sell trade is closed by buying back at the ask, which is a little higher. The gap between them is the spread.

Say you sell gold at 4030 with a stop at 4040, and the spread is $0.30. The chart’s high is 4039.70, so it looks like your stop was never touched. But the ask reached 4040.00, and your trade closed. This catches a lot of beginners, especially around the daily market break, when spreads are wider.

Trailing stop loss

A trailing stop moves with the price. You set a distance, say 150 pips. As the trade moves your way, the stop follows 150 pips behind the best price so far. If price turns, the stop stays where it is and closes the trade.

Gold price	Trailing stop (150 pips)
You buy at 4030	4015
Price rises to 4045	4030
Price rises to 4060	4045
Price falls back to 4045	Stop hit, trade closed at about 4045

In MetaTrader 5, a trailing stop runs in the platform on your computer, not at the broker. Close the platform and the stop stops following price. It stays where it last was, so it still protects you.

Where does the stop go?

The honest short answer: where the trade idea is proven wrong, not where the loss feels comfortable.

If the reason for buying at 4030 is that gold should hold above 4020, then 4020 is where the idea is wrong. Putting the stop at 4025 because “I only want to lose $25” just gets you stopped out of a trade that was still valid. The right fix is a smaller position, not a closer stop.

How analysts decide exactly where an idea is wrong is part of their method and needs proper training and practice. A good trade idea always comes with its stop already set.

Mistakes beginners make

• Trading without a stop. “I’ll close it myself if it goes wrong” rarely works when it does.
• Moving the stop further away. It turns a planned loss into a bigger, unplanned one. Stops can move to reduce risk, never to add it.
• Sizing the stop to the money instead of the money to the stop. Set the stop where the idea is wrong, then pick the lot size.
• Stops too tight for gold. A 20-pip stop on gold is a $2 move. Normal noise and the spread can close it in seconds.
• Forgetting stops on pending orders. Attach the stop loss when you place the order, so it’s there if the order fills while you’re away.

Key points

• A stop loss closes a losing trade at a level you set in advance. A take profit closes a winning one.
• On a buy the stop goes below the entry; on a sell it goes above.
• Pips decide the distance; your lot size decides the money. Check it with the position size calculator.
• Stops can fill worse than planned in fast markets and over weekend gaps.
• The spread can trigger a sell trade’s stop before the chart shows it.
• Put the stop where the idea is wrong, then size the trade to fit.

Next: why risk per trade matters more than win rate, and how a good stop and a small position keep you trading through a losing streak.