How to Set Stop-Losses? What Is Take-Profit?

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The Importance of Stop-Losses

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Why Must You Use Stop-Losses?

• Small losses are easy to recover
• Big losses can be fatal
• As long as you keep the mountain green, you won’t run out of firewood

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Psychological Significance

• Reduce emotional interference
• Maintain objective judgment
• Avoid the “hold and hope” mindset
• Maintain trading discipline

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Stop-Loss Methods

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1. Percentage Stop-Loss

• Principal: 10,000
• Stop-loss percentage: 2%
• Stop-loss amount: 200
• Suitable for: all trading instruments

• ✅ Simple and easy to execute
• ✅ Risk is controllable
• ❌ Does not account for volatility
• ❌ May stop out too early

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2. Technical Stop-Loss

• Place it below an important support level
• Distance: 2–3% below support
• Basis: technical analysis

• Stop out when price breaks below a key moving average
• Common: 20-day, 50-day MA
• Suitable for: trend trading

Stop level = Entry price - (ATR × multiple)
The multiple is usually 1.5–3

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3. Time Stop-Loss

• event-driven trading
• short-term trading
• avoid tying up capital for too long

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4. Combined Stop-Loss

1. Technical stop: -3%
2. Fixed-percentage stop: -2%
3. Final stop: -2% (take the smaller value)

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The Art of Take-Profit

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Why Is Taking Profit So Hard?

• Greed: always want more
• Regret: feel bad for selling too early
• Fear: fear missing a big move

• Tops are hard to predict
• Trends may continue
• Taking profit too early limits profits

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Take-Profit Methods

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1. Target Take-Profit

• Set: e.g., take profit at +20%
• Pros: clear target
• Cons: may miss a big move

• Set: e.g., 1:3 (risk 1 to make 3)
• Example: stop 200, target profit 600
• Suitable for: swing trading

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2. Trailing Take-Profit

Initial stop: Entry price -5%
After price rises 10%: move stop up to entry price
After price rises 20%: move stop up to +10%
Always keep a fixed distance from the highest price

• Take profit when price pulls back X% from the highest point
• Common: 10%–20% pullback
• Protect unrealized gains while allowing room

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3. Scaling-Out Take-Profit

Profit +10%: sell 1/3
Profit +20%: sell 1/3
Profit +30%: sell 1/3

• Keep 30% as a core position
• Scale out the rest
• Balance realized gains and upside participation

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4. Technical Take-Profit

• prior highs
• round-number levels
• Fibonacci levels

• top patterns appear
• abnormal volume
• indicator divergence

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Principles for Setting Stops and Targets

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Reasonableness

1. Consider volatility: more volatile instruments need wider stops
2. Match the timeframe: wider for long-term, tighter for short-term
3. Align with position size: stricter for large positions; smaller positions can allow more room

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Consistency

• Set before the trade; don’t change casually
• Execute strictly; don’t let emotions interfere
• Record and reflect; continuously optimize

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Flexibility

• Adjust to market conditions
• Major news can be exceptions
• But you need explicit rules

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Common Mistakes

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Stop-Loss Mistakes

1. No stop-loss: the biggest mistake
2. Stops too tight: triggered too often
3. Moving the stop away: disguised refusal to stop out
4. “Mental stops”: weak execution

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Take-Profit Mistakes

1. No take-profit plan: never take money off the table
2. Taking profit too early: small wins and out
3. Greedily never taking profit: giving back gains
4. Emotional decisions: chasing highs and selling lows

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Real-World Examples

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Case 1: The value of strict stop-losses

Entry: 100
Stop: 95 (-5%)
Actual move: drops to 94, then rebounds to 110

Result: stopped out and missed the rebound
Lesson: stops may miss opportunities, but they protect capital
Better approach: after stopping out, re-enter after stabilization

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Case 2: Using trailing take-profit

Entry: 50
Initial stop: 47.5 (-5%)
Price rises to 60: move stop up to 55
Price rises to 65: move stop up to 58.5
Exit at 58.5 on the trailing stop

Result: locked in 17% profit
Takeaway: not the top, but a solid locked-in gain

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Tools and Tips

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Automation Tools

• Stop orders: trigger automatically at preset prices
• OCO orders: one triggers and the other is canceled automatically
• Alerts: price alerts to support decision-making

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Psychological Training

1. Accept losses: stop-loss is a cost, not a failure
2. Overcome greed: taking profit is also a win
3. Maintain discipline: rules beat feelings
4. Think long term: one trade doesn’t matter much

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Summary

• Stop-loss: control risk and protect capital
• Take-profit: lock in gains and bank profits
• Balance: find the balance between protection and opportunity
• Discipline: execution matters more than strategy

“Cut losses short and let profits run” — the golden rule of trading