Stop-Loss and Take-Profit Levels: How to Calculate and Set Them

We highlighted multiple times already that, as a trader, controlling risk is essential. One of the best ways to do that is by using stop-loss and take-profit orders. Simply put, they give traders control over their risk and reward, and allow them to stick to their plans, no matter how volatile the market gets.

You could say that stop-loss orders are like safety nets for traders, cushioning the fall when prices move against them. On the flip side, take-profit orders act like exit signs, helping traders lock in profits when things go their way. But are these tools really necessary, and how do you use them effectively?

In this guide, we’ll answer those questions, explore how to calculate and set stop-loss and take-profit levels, and give you some practical tips on making them work for you. Plus, we’ll show you how you can easily manage these levels on Morpher, where zero-commission trading gives you more flexibility in your strategy.

What are Stop-Loss and Take-Profit Levels?

Stop-loss and take-profit levels are tools that help you manage your trades and control your risk. A stop-loss protects you from losing too much money by automatically closing your trade if the market moves against you and hits a price you’ve set in advance. This helps limit your losses and safeguard your capital.

For example, if you buy a stock at $100 and set a stop-loss at $90, your position will close if the price drops to $90. On the flip side, a take-profit level automatically closes your trade when the market reaches a price where you’ve set your profit target. So, if you set a take-profit at $110, your position will close if the price rises to $110, locking in your gains.

It’s an effective and easy way to manage risk, no matter what you’re trading, stocks, forex, crypto or commodities. If you want to learn more about stop-loss strategies, check out our full guide here.

Stop-Limit vs Stop-Loss Orders

It’s important to understand the distinction between stop-loss orders and stop-limit orders. While both are designed to protect your investments, they function differently:

Stop-Loss Orders

These are triggered when the price reaches the set stop price. Once activated, the order is placed as a market order, meaning it will be filled at the best available price, which could be slightly different from the stop price due to market conditions.

Stop-Limit Orders

Once the stop price is reached, a stop-limit order turns into a limit order. This means it will only be filled at the specified price or better. While this gives you more control over the execution price, there’s a risk that the order might not be executed at all if the market moves too quickly.

For more detailed information, refer to our full guide on the differences between stop-loss and stop-limit orders here.

How to Calculate Stop-Loss and Take-Profit

Without any further delay, let’s get to what you came for.  We’ll walk you through a detailed example to make the stop-loss and take-profit levels calculation clear, and you won’t need any tools for calculating your profits anymore.

Common Calculation Methods

Percentage-Based Method: This is one of the most common methods. For example, you may set a stop-loss at 5% below your entry price.
ATR (Average True Range) Method: The ATR measures market volatility. Using this method, you calculate the stop-loss based on recent price movements to account for volatility.

Step-by-Step Example for Calculating Stop-Loss and Take-Profit

1. Define Your Entry Price: This is the price at which you enter the trade. For example, if you buy a stock at $100, your entry price is $100.
2. Set Your Stop-Loss Level:
   • Long Position: If you’re buying, the stop-loss is usually set below the entry price. For instance, if you set a stop-loss 5% below your entry price, you would set it at $95.
   • Short Position: If you’re selling, the stop-loss is set above the entry price. For example, a 5% stop-loss above $100 would be set at $105.
3. Set Your Take-Profit Level:
   • Long Position: The take-profit is typically set above your entry price, aiming for a desired return. For instance, you may set it 10% above your entry price, which would be $110.
   • Short Position: The take-profit is set below the entry price. A 10% take-profit below $100 would be set at $90.

How to Determine Stop-Loss and Take-Profit Levels

When setting your stop-loss and take-profit levels, there are a few important considerations to make:

Risk-Reward Ratio: This ratio helps you evaluate the potential return against the risk you’re taking. A common risk-reward ratio is 1:2, meaning you’re willing to risk $1 to potentially make $2. Personally, I recommend aiming for a risk-reward ratio of at least 2:1 or 3:1. 

Mathematically, this increases your chances of success as a trader. Tight stop-losses might seem like a good idea at first, but they can just bleed your account over time. Some traders use tight stop-losses to offset financial loss, but this leads to trading your P/L rather than trading based on the chart in front of you.

The best approach is to put your stops where your trade idea is broken and your take-profit where your idea is fulfilled. If the risk/reward doesn’t align, say, you’re risking more than you could potentially make, then don’t take the trade. Keep it simple and stick to your plan.

Market Conditions: If the market is volatile, consider setting wider stop-loss and take-profit levels. During stable conditions, you may prefer tighter levels to lock in profits more quickly.

Trade Type: Whether you’re holding a long-term or short-term position will influence where you set your levels. For long-term traders, a wider stop-loss might be appropriate to give the trade room to breathe, while short-term traders may prefer tighter levels to minimize risk.

Case Example: Determining Stop-Loss and Take-Profit Level

Let’s say you buy an asset at $100 and decide to use a risk-reward ratio of 1:2.
Stop-Loss: You’re willing to risk 5%, so your stop-loss is set at $95 (5% below your entry price).
Take-Profit: Based on a 1:2 risk-reward ratio, your take-profit is set at $110 (10% above your entry price).
This means if the price drops to $95, your position will be automatically closed to limit your losses. If the price rises to $110, your position will be closed to lock in profits.

Setting Stop-Loss and Take-Profit Levels on Morpher

At Morpher, you can easily set target levels to help manage your trades effectively. On the platform, both stop-loss and take-profit levels are set in terms of price, not percentage. This means you can define a stop-loss level based on the market price at which your position will be closed as a loss.

Morpher’s zero-commission trading model also gives you the flexibility to place these orders without worrying about additional costs eating into your profits.

To set your stop-loss on Morpher, simply:

1. Sign in to your Morpher account or create one in few minutes.
2. Choose the asset you want to trade and open your position.
3. Select the “Stop-Loss” and/or “Take-Profit” option.
4. Enter the price at which you want your position to close in the event the market moves against you.
5. Adjust as necessary depending on market conditions.

Common Mistakes in Using Stop-Loss and Take-Profit Levels

Even experienced traders make mistakes when using stop-loss and take-profit orders. Here are some common pitfalls to avoid:

1. Setting Stops Too Tight: If your stop-loss is too tight, the market’s natural fluctuations may trigger it prematurely. Ensure your stops allow enough room for the market to move.
2. Ignoring Spreads: Always account for spreads when setting your price thresholds. Spreads can cause your orders to be executed at slightly different prices, which may impact your risk management strategy.
3. Failing to Adjust Orders: Market conditions change, and so should your stop-loss and take-profit levels. Regularly review and adjust your orders to reflect these changes.

Emotional Trading: Don’t let emotions dictate your stop-loss and take-profit decisions. Stick to your plan and avoid chasing the market.

Ready to Take Control of Your Trades?

By using these tools wisely, you’re not only protecting your capital but also setting yourself up for more consistent success without having to watch the markets 24/7. The right risk management strategy lets you trade with confidence, knowing that your positions are safeguarded.

With Morpher’s zero-commission trading, you can take full control of your trades while keeping your costs down. It’s never been easier to set stop-loss and take-profit orders to protect your investments and lock in gains.

Start trading on Morpher today, and put your risk management plan into action.

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.