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What is a Stop Loss (S/L) and Take Profit (T/P)?

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Written by Julia Pennington
Updated over 2 weeks ago

Stop Loss (S/L) and Take Profit (T/P) are tools used in trading to manage risk.

Stop Loss Order

  • A stop loss order is a predetermined price level, at which a trader will exit a losing position to prevent further losses. It is designed to limit an investor's loss on a position in a security.

Take Profit Order

  • A take profit order is a predetermined price level, at which a trader will exit a profitable position to secure gains. It is used to lock in profits once a certain price target is reached.

Should your trade reach the S/L or T/P price, the trade will be closed out automatically.

Setting a S/L or T/P price

When executing a trade, you will have an option to set your S/L and/or T/P price. Should your trade reach the S/L or T/P price, the trade will be closed out automatically.

For a long position (buy), the S/L must be lower than the current instrument price, and the T/P must be higher than instrument price.

For example:

If a trader buys a stock at R50 and sets a stop loss at R45, if the stock price drops to R45, the stop loss order will trigger and automatically sell the stock, limiting the loss to R5 per share.

If a trader buys a stock at R50 and sets a take profit at R55, if the stock price rises to R55, the take profit order will trigger and automatically sell the stock, securing the profit of R5 per share.

For a short position (sell), the S/L must be higher than the current instrument price, and the T/P must be lower than instrument price.

For example:

If a trader shorts a stock at R50 and sets a stop loss at R55, if the stock price rises to R55, the stop loss order will trigger and automatically close the position, limiting the loss to R5 per share.

If a trader shorts a stock at R50 and sets a take profit at R45, if the stock price decreases to R45, the take profit order will trigger and automatically close the position, securing the profit of R5 per share.

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