How to Determine Take Profit and Stop Loss: A Practical Guide for Traders

Why This Matters

If you are serious about trading, you must understand: without a clear exit plan from a position, you will turn into a gambler rather than a trader. Take profit is not just a beautiful word — it is your strategy for locking in profits when the market moves in your favor. Similarly, stop-loss is your financial safety cushion that protects capital from catastrophic losses.

Many novice traders make the same mistake: they enter a trade but forget to determine in advance when to exit. The result? Emotions take over, and a loss turns into a massive portfolio collapse.

Two Pillars of a Proper Exit

Stop-loss is a target price below your entry price. When the asset falls and touches this level, the position closes automatically, limiting losses. Without a stop-loss, one unsuccessful trade can wipe out months of profits.

Take Profit — the opposite tool. This is the price above your entry point, at which profit is locked in and the position is closed. If you wait for even greater growth, the market may turn against you, and your profit could evaporate.

Instead of sitting in front of the screen and manually closing positions, most modern trading platforms allow you to set these levels once and forget about them until the order is triggered.

What are these levels for

Capital Protection

The main goal of a stop-loss is to prevent the loss of the entire account. The market is unpredictable, and even experienced traders make mistakes. A properly set stop-loss ensures that you will lose exactly as much as you planned, but no more. This allows you to trade more boldly, knowing that safety is backing you up.

Systematization of Trade

Predefined exit levels save you from having to make decisions in stressful situations. When the price suddenly drops or rises, fear and greed often become your advisors. With set levels, you trade according to plan, without succumbing to impulsive decisions.

Risk-to-Reward Ratio Calculation

Serious traders never enter a position just like that. They calculate how much they risk to earn. The formula is simple:

Risk/Reward = (Entry Price − Stop Loss) / (Take Profit − Entry Price)

If this number is greater than 1:2 (, meaning you risk 1 dollar to earn 2 dollars ), the trade is already interesting. If it's less — it's probably worth skipping.

Methods for Determining Optimal Levels

Using support and resistance

On any price chart, there are critical levels where the crowd begins to actively buy (support) or sell (resistance). These zones act as psychological barriers.

Practice shows: if the price breaks through support, it may fall even lower. Therefore, it is wise to set a stop-loss slightly below support. Similarly, take profit is often placed just below resistance, from where the price often bounces back.

Beginners often place stop-loss orders right at the support level, which leads to triggering due to noise and spikes, rather than at a real reversal.

Following trends through moving averages

The moving average (MA) is an indicator that smooths out price fluctuations and shows the true direction of the trend. A short MA (, for example, 20 days) reacts quickly, while a long (, for example, 200 days) shows the long-term direction.

When the short MA crosses the long one from bottom to top, the trend is rising. This is a signal to open a buy position. Accordingly, the stop-loss is often placed below the long moving average — if the price falls below it, the trend is considered broken.

Interest-based approach

Some traders prefer to keep it simple: they just set a fixed percentage for loss or profit. For example, a stop-loss at -5% from the entry, take profit at +10%.

This method is good for beginners as it does not require chart analysis. The downside is that it does not take into account the volatility of a specific asset. For a coin that usually fluctuates by ±10%, such a strategy will trigger on noise.

Momentum and Volatility Indicators

Traders use other tools as well:

• RSI (Relative Strength Index) indicates whether the asset ( is overbought above 70) or oversold below 30(. If the RSI is above 70 and you are in a position, maybe it's time to take profits?

• Bollinger Bands )BB( indicate volatility. If the price breaks above the upper band, it often signals a pullback. Take profit can be placed there.

• MACD combines moving averages and shows changes in momentum. When the MACD changes direction, the position can be closed.

Experienced traders often combine several indicators to obtain a more reliable signal.

Practical Tips

Do not set levels too close to the entry. A stop-loss at 1% and take profit at 2% means you are trading with a very high frequency of triggers. In more volatile markets, this will lead to constant losses from noise.

Adapt the approach to volatility. In a calm market, narrow levels can be used. In a turbulent market, wider ranges are needed; otherwise, orders will trigger randomly.

Document your decisions. After closing each position, write down why you chose those specific levels. This will help you improve your strategy over time.

Final Summary

Stop-loss and take profit are not just functions of a trading platform — they are the foundation of risk management. They transform trading from a game of chance into a systematic decision-making process.

Every trader must develop their own approach: some prefer technical support levels, others find the percentage method easier, while some combine several indicators. The main thing is to have a clear plan before opening a position, rather than hoping for luck.

Remember: best risk management is not what guarantees profit, but what guarantees the survival of your capital over the long term. And in this, stop-loss and take profit levels are your reliable assistants.