Every trade you open has two possible exits built in before it even starts: a stop loss, which closes the trade if it moves against you past a certain point, and a take profit, which closes it once it's moved in your favor by a certain amount. Neither is optional in any strategy worth running unattended - together they're what turn "I opened a trade" into "I opened a trade with a known, bounded outcome."
Stop loss: your answer to "what if I'm wrong"
A stop loss isn't a prediction that the trade will fail - it's an acknowledgment that it might. It defines, in advance, the exact point where you'll admit that and get out, before a small loss has a chance to become a large one. The number itself matters less than the fact that it's decided before you're emotionally attached to the position, not in the middle of watching it move against you.
Take profit: locking in the win before it reverses
A take profit does the opposite job: it closes the trade once you've captured the move you were expecting, rather than leaving you to guess when a winning trade has run its course. Without one, it's easy to watch a solid gain shrink back down while waiting for "just a bit more."
Three common ways to size them
- Pips - a fixed distance from your entry price (e.g. 20 pips). Simple and predictable, but the same 20 pips means something different on a calm day than on a volatile one.
- Percent of entry price - scales automatically with the instrument's price, useful when trading several assets with very different price levels (comparing a 20-pip stop on EUR/USD to one on a stock index doesn't mean much; a percentage does).
- A multiple of ATR (Average True Range) - sets your stop relative to how much the instrument is actually moving right now. A stop of "1.5 × ATR(14)" automatically widens on volatile days and tightens on quiet ones, instead of staying fixed regardless of conditions.
None of these is universally "correct" - pips are easiest to reason about when you're starting out, percent is convenient across multiple instruments, and ATR-based sizing tends to hold up best across changing market conditions. What matters more than which one you pick is that every trade has one, sized on purpose rather than left to whatever the platform defaults to.
The part that's easy to skip
It's tempting to focus entirely on the entry condition - the RSI level, the moving average cross, whatever signals the trade - because that's the "clever" part of a strategy. But two strategies with an identical, genuinely good entry condition can have completely different results depending only on how the stop loss and take profit are sized. Risk management isn't the boring part bolted onto a strategy; it's a full half of what makes one work. The other half - deciding how large a position to actually open - is covered in position sizing.