Where to Place Stop-Loss and Take-Profit Orders: Four Methods and Three Rules

A stop-loss is an order that closes a trade at a set price to limit the loss. A take-profit is an order that closes it at a target price to bank the gain. Where they sit decides the risk, the reward and how often you are right. This article covers four ways to place a stop, how to choose targets, and rules that apply to all of them.

A stop belongs where the idea is wrong

The most useful question for a stop is not how much can I afford to lose. It is: at what price is my reason for the trade no longer valid? If you buy because price bounced from support, a decisive break below that support shows the idea has failed, and that is where the stop belongs. The amount you can afford to lose then decides the position size, not the stop.

A stop placed at an arbitrary distance, say 20 pips because that feels comfortable, may sit inside normal price noise and be hit by moves that say nothing about the idea. A stop that is wide enough to survive noise but is paired with an oversized position solves nothing. The sequence is: find the invalidation price, then size the position so the loss at that price equals your planned risk.

Method 1: behind market structure

For a long trade, place the stop below a level the market should defend, such as a support zone or a swing low. For a short trade, place it above resistance or a swing high. Leave a buffer beyond the level instead of sitting exactly on it: obvious levels attract many stops, and price often pokes through them briefly before turning. See Support and Resistance Zones for how to mark the zones.

An example with invented prices. EUR/USD bounces from support at 1.0800 and a trader buys at 1.0850. The latest wick low is 1.0792, so the stop goes 12 pips beyond it at 1.0780, 70 pips from entry. Resistance is at 1.1000 and the target sits just beneath it at 1.0990, 140 pips away. That is a reward-to-risk of 2 : 1. With a $10,000 account risking 1%, or $100:

Method 2: a multiple of volatility (ATR)

Average True Range (ATR) measures how far a market typically moves per candle. A stop at a multiple of ATR adapts to conditions: wider when the market is volatile, tighter when it is quiet. Multiples of 1.5 to 2 are common, but the right multiple is a judgement to test, not a constant. The indicator itself is covered in Bollinger Bands, ATR and Volatility-Based Position Sizing.

Say the daily ATR(14) on EUR/USD is 80 pips and the trader uses 1.5 times ATR, a 120-pip stop. With $100 of risk, lots = 100 / (120 x 10) = 0.083, rounded down to 0.08, risking $96. A target at 2 : 1 would be 240 pips, which is three times the average daily range. That is a useful check: ask whether the market can plausibly travel that far in the time you are willing to hold, or whether you need a closer target or a longer holding period.

Method 3: a time stop

A time stop closes a trade that has not worked within a set number of candles, whatever the price. A breakout that fails to follow through soon after it happens often means the move is stalling, and the money tied up in the trade could be used elsewhere. For example, a trader might close a breakout trade that has not reached +1R after six four-hour candles. The number is a rule to test and refine on past trades, not a known truth. A time stop also reduces the financing cost of positions that go nowhere.

Method 4: maximum adverse excursion

Maximum adverse excursion (MAE) is the furthest a trade moved against you before it closed. If you record it for every trade in a journal, you can look at your winners and ask how far they went against you on the way. Suppose a trader reviews 30 winning trades and ranks them by MAE. The 27th, which is the 90th percentile, had an MAE of 32 pips. A stop around 35 pips would have kept nine in ten of those winners alive.

This method needs a decent sample of trades, ideally taken with a consistent setup, and it describes the past. Stops that look ideal on history can fail when conditions change. The analysis also has to include losers: a tighter stop that saves winners but increases the number of stop-outs may not improve expectancy. It is a way of replacing guesses with measurement, not of finding a perfect number.

Where to place take-profit orders

Targets are less precise than stops, because price has no obligation to reach any level. The common approaches are:

• The next opposing level: resistance for a long, support for a short. Place the order slightly inside the level, because price often turns just short of it.
• A multiple of risk, such as 2R, which fixes the reward-to-risk ratio before entry.
• A measured move: the height of a pattern or range projected from the breakout.
• A multiple of ATR, which ties the target to realistic daily travel.
• Scaling out: closing part of the position at a first target and managing the rest differently.

Whichever you choose, decide it before entering. Targets chosen after the trade is open tend to follow how you feel about the position, not what the market structure suggests. Spread also matters: on most platforms a long position closes on the bid price and a short on the ask, so a target set at a level on the chart may need the bid to reach it, not the quoted mid price.

Three rules that apply to every method

1. Place the stop where the idea is wrong, and set it when you enter the trade. A trade without a stop is a decision to risk an unknown amount.
2. Never move a stop further from your entry to give a losing trade more room. That turns a defined risk into an undefined one. Moving a stop towards profit is a separate matter, covered in the next article.
3. Size the position from the stop distance and your risk percentage, never the stop from the position you want.

Putting it together before you enter

A workable order of operations is the same for any of the methods. First mark where the idea is invalid and add a buffer. Then measure the distance to that price and calculate the position size from your risk percentage. Next, find the target and check that the reward-to-risk ratio justifies the trade: if the nearest opposing level is only 0.8R away, the setup may not be worth taking, however clean the entry looks. Finally, place the stop and the target together with the entry, so the trade is never open without protection.

Combining methods is common. A trader might place the stop behind structure, check that its distance is at least one ATR so that noise is unlikely to reach it, and add a time stop for trades that stall. If structure and volatility disagree, a stop that is too tight for the market's normal range is the usual problem, and the fix is a smaller position, not a tighter stop.

What a stop cannot do

A stop-loss is usually a trigger that turns into a market order, so it fills at the next available price. In quiet conditions that is near your level. Over a weekend, after a news release or in thin markets, price can gap past it and the fill can be much worse. This is called slippage. Some providers offer guaranteed stops that close at your level whatever happens, typically for a premium or a wider spread, and availability varies by provider and account type. A stop limits risk. It does not remove it.

Sources: standard definitions of structure-based, ATR-based and MAE-based stops from the technical analysis literature. ATR was introduced by J. Welles Wilder in New Concepts in Technical Trading Systems (1978). All prices and results are invented for illustration. Next in the series: The Disciplined Way to Move Your Stop-Loss and Trade Tight-Stop Breakouts.