📘 Chapter 4, Section 1

Stop-Loss & Take-Profit
Your Trading Seatbelt

⏱️ 15 minutes
📊 Beginner Friendly
🎯 Risk Management
🎯 What You Will Learn
  • Understand what a stop-loss is and why it's the most important safety tool in trading
  • Learn three practical ways to place your stop-loss based on chart structure, volatility, and fixed distances
  • Know what a take-profit is and why planning your exit is just as important as planning your entry
  • Apply three methods to set take-profit levels using risk-reward ratios, chart structure, and partial exits
  • Build the habit of setting your SL and TP before you enter any trade—not after
📖

Introduction: Why This Section Matters

Imagine you're driving a car. You wouldn't drive without a seatbelt, right? In trading, your stop-loss is your seatbelt. It protects you when things go wrong.

Here's the reality: even the best traders get stopped out. Even perfect-looking setups can fail. The market doesn't care about your analysis—it moves based on millions of buyers and sellers, news events, and emotions you can't control.

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But here's what you CAN control: How much you're willing to lose on each trade, where you'll exit if you're wrong, and where you'll take profit if you're right.

Without a stop-loss, one bad trade can wipe out weeks or even months of gains. Without a take-profit plan, you might watch a winning trade turn into a loss because you didn't know when to exit.

This section teaches you how to use these two tools like a professional trader: with logic, discipline, and a clear plan.

1.1

What is a Stop-Loss (SL)?

Definition: A stop-loss is a price level where you exit the trade because your trading idea is proven wrong. It's not a "maybe I'll change my mind later" level. It's a hard line that says: "If price reaches this point, I was wrong, and I'm getting out to protect my account."

Why You Must Set It BEFORE Entering the Trade

Many beginners make this mistake: they enter a trade, watch it move against them, and then start thinking about where to put their stop-loss. By that time, fear and panic take over. They either:

  • Set the stop-loss too close (and get stopped out by normal market noise), or
  • Don't set one at all (and watch their account bleed)
✅
The Golden Rule: Decide your stop-loss before you click "Buy" or "Sell." This keeps emotions out of the decision.

The #1 Rule: Never Move Your Stop-Loss Farther Away

Once you've entered a trade and set your stop-loss, never move it farther from your entry to "give the trade more room."

⚠️
Why? Because that's emotional trading. You're basically saying, "I don't want to admit I was wrong, so I'll risk more money." If the market hits your original stop-loss, it means your setup didn't work. Accept it, exit the trade, and move on.

You CAN move your stop-loss closer to lock in profit as the trade moves in your favor (this is called a "trailing stop"). But never move it farther away after entry.

📊 Stop-Loss Visualization
Entry Price
Stop-Loss
Take-Profit
1.2

Three Ways to Place Stop-Loss

There's no single "perfect" way to place a stop-loss. The best method depends on your trading style, the market you're trading, and the setup you're using. Here are three proven methods:

Method 1 Structure-Based Stop-Loss

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This method uses recent price structure—swing highs and swing lows—to place your stop-loss.

How it works:

  • If you're going long (buying), place your stop-loss just below the most recent swing low.
  • If you're going short (selling), place your stop-loss just above the most recent swing high.

Why does this work? Because if price breaks through a recent swing point, it signals that the trend or pattern you were trading is no longer valid.

📈 Example: Long Trade (EUR/USD)

You spot a bullish breakout. Last swing low was at 1.1000. You enter long at 1.1050.

Entry:1.1050
Stop-Loss:1.0990 (below swing low)
Risk:60 pips
📉 Example: Short Trade (BTC/USDT)

Bearish breakdown below $28,000 support. Last swing high was $28,500.

Entry:$27,900
Stop-Loss:$28,550 (above swing high)
Risk:$650
✓ Pros
  • Based on real market structure
  • Gives trade room to breathe
✗ Cons
  • Swing points can be far (higher risk)
  • Requires practice to identify

Method 2 Volatility-Based (ATR)

▼

This method adapts your stop-loss to the current volatility of the market using ATR (Average True Range).

What is ATR? ATR measures the average price movement (in pips or dollars) over the last 14 candles. High ATR = volatile market. Low ATR = calm market.

How it works:

Multiply the ATR value by 1.5 or 2 to set your stop-loss distance.

📈 Example: Forex (GBP/USD)

ATR on 1H chart = 40 pips. Using 1.5× ATR multiplier.

ATR × 1.5:60 pips
Entry Long:1.2500
Stop-Loss:1.2440
📈 Example: Crypto (ETH/USDT)

ATR on 4H chart = $30. Using 2× ATR multiplier.

ATR × 2:$60
Entry Long:$1,800
Stop-Loss:$1,740
✓ Pros
  • Adapts to market conditions
  • Avoids noise-triggered stops
✗ Cons
  • Need to learn ATR indicator
  • Wide stops in volatile markets

Method 3 Fixed-Distance Stop-Loss

▼

The simplest method, especially for beginners. You decide on a fixed number of pips (forex) or a fixed dollar amount (crypto), and always use that distance.

📈 Example: Forex (EUR/USD)

Always using 20-pip stop-loss.

Entry Long:1.1050
Stop-Loss:1.1030
Entry Short:1.1050
Stop-Loss:1.1070
📈 Example: Crypto (BTC/USDT)

Always risking $50 per trade.

Entry Long:$30,000
Stop-Loss:$29,950
✓ Pros
  • Super easy to calculate
  • Great for beginners
✗ Cons
  • Doesn't adapt to conditions
  • May stop out in choppy markets
1.3

What is Take-Profit (TP)?

Definition: A take-profit is a price level where you exit the trade to lock in your profit. Just like a stop-loss protects you from losses, a take-profit protects you from giving back your gains.

Why You Need a Plan to Exit Winners

Many beginners focus only on where to enter and where to stop out—but they forget to plan their exit when the trade goes their way.

❌
What happens without a take-profit plan: The trade goes up → you feel happy and greedy → you want "more" → market reverses → profit disappears → panic → exit at breakeven or worse. Avoid the regret of "I was up ₱5,000, now I'm down ₱2,000."
✅
With a take-profit plan, you: Know exactly where to exit before emotions kick in, lock in profits confidently, and trade with peace of mind.
1.4

Three Ways to Set Take-Profit

Method 1 Risk-Reward Ratio (R:R)

▼

The most popular method among professional traders. If you're risking ₱100, how much do you want to make?

📊
Common Risk-Reward Ratios:
1:1 – Risk ₱100 to make ₱100 (break-even at 50% win rate)
1:1.5 – Risk ₱100 to make ₱150 (profitable at 40% win rate)
1:2 – Risk ₱100 to make ₱200 (profitable at 35% win rate)
1:3 – Risk ₱100 to make ₱300 (profitable at 30% win rate)

How to Calculate:

  1. Measure the distance from entry to stop-loss
  2. Multiply by your desired reward ratio
  3. Add that distance to your entry for take-profit
📈 Example: Forex (1:2 R:R)
Entry Long:1.1050
Stop-Loss:1.1030 (20 pips risk)
Take-Profit:1.1090 (40 pips reward)
Ratio:1:2
📉 Example: Crypto Short (1:3 R:R)
Entry Short:$30,000
Stop-Loss:$30,200 ($200 risk)
Take-Profit:$29,400 ($600 reward)
Ratio:1:3
✓ Pros
  • Simple and disciplined
  • Profitable with lower win rate
✗ Cons
  • Ignores market structure
  • TP might be in "nowhere"

Method 2 Structure-Based Take-Profit

▼

Places your take-profit at the next logical resistance (for longs) or support (for shorts) on the chart.

How it works:

  • Going long? Look for the next resistance zone where price might stall or reverse.
  • Going short? Look for the next support zone.
📈 Example: Long Trade

You see strong resistance at 1.1120 where price rejected multiple times.

Entry:1.1050
Stop-Loss:1.1030 (below swing low)
Take-Profit:1.1120 (before resistance)
📉 Example: Short Trade

You see strong support at $28,500 that held several times.

Entry:$30,000
Stop-Loss:$30,200
Take-Profit:$28,500 (above support)
✓ Pros
  • Based on real market behavior
  • Higher chance price reaches target
✗ Cons
  • Requires chart reading skills
  • S/R isn't always clear

Method 3 Partial Exits + Trailing Stop

▼

For traders who want to lock in some profit early while letting the rest of the trade run.

How it works:

  1. Take partial profit at a safe level (e.g., 1:1 or 1:1.5 R:R)
  2. Move your stop-loss to breakeven (entry price)
  3. Let remaining position run, trailing your stop as price moves
📈 Example: EUR/USD Trailing Stop

Entry: 1.1050 | SL: 1.1030 (20 pips risk)

At 1.1070 (1:1):Close 50%, move SL to 1.1050
Price continues:Trail SL every 10 pips
If reverses:Exit at breakeven (no loss)
✓ Pros
  • Reduces stress—profit locked in
  • Catches big moves risk-free
✗ Cons
  • More active management
  • Might exit early on trends
🔑
Key Takeaway: Logic Over Emotion
Your stop-loss and take-profit should be based on logic—not on what "feels comfortable."
🧮

Risk-Reward Calculator

Use this calculator to plan your trades with precise stop-loss and take-profit levels.

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Calculate Your SL & TP
Entry Price —
Stop-Loss —
Take-Profit —
Risk-Reward —
Min Win Rate Needed —
📈
ATR Stop-Loss Calculator
ATR Distance —
Stop-Loss Level —
🎴

Key Concepts Flashcards

Click on each card to reveal the answer. Test your understanding of the key concepts.

What is a Stop-Loss?
A price level where you exit a trade because your trading idea is proven wrong. It protects your capital from large losses.
What is ATR?
Average True Range—an indicator that measures average price movement over 14 candles. High ATR = volatile market, Low ATR = calm market.
What is a 1:2 Risk-Reward Ratio?
Risking 1 unit to potentially gain 2 units. Example: Risk ₱100 to make ₱200. Profitable even with 35% win rate.
When should you move your stop-loss?
Only move it CLOSER to lock in profit (trailing stop). NEVER move it farther away—that's emotional trading.
Where do you place a structure-based SL for a long trade?
Just BELOW the most recent swing low. If price breaks this level, your bullish thesis is invalidated.
What is a trailing stop?
Moving your stop-loss closer to current price as the trade moves in your favor, locking in profit progressively.

💡 Click any card to flip it

⚠️

Common Mistakes & Pro Tips

Common Mistakes to Avoid

❌ Bad Approach

"I'll just risk ₱500 because that's what I can afford to lose."

✅ Good Approach

"I'll place my SL below the last swing low because if price breaks that, my setup is invalid."

❌ Bad Approach

"I'll take profit when I feel like it."

✅ Good Approach

"I'll take profit at the next resistance zone, giving me a 1:2 risk-reward ratio."

🚫 Mistakes Checklist
  • Not setting a stop-loss at all – This is gambling, not trading. Always set your SL before entering.
  • Moving your stop-loss farther away after entry – This is emotional trading. Stick to your original plan.
  • Setting take-profit too close – Don't aim for just 5-10 pips. Give your trade room to breathe.
  • Ignoring market structure – Your SL and TP should make sense based on the chart, not random numbers.

Pro Tips

  • Use demo accounts to practice placing SL and TP without risking real money.
  • Write down your SL and TP in a trading journal before entering—this keeps you accountable.
  • Review your trades weekly: Did your stop-loss make sense? Was your TP realistic? Adjust and improve over time.
  • Start with simple methods (like fixed-distance or 1:2 R:R), then graduate to structure-based stops as you gain experience.
📝

Knowledge Check

🧠 Test Your Understanding
Question 1 of 5
✅

Quick Summary

📚 What You Learned

🛡️ Stop-Loss (SL)

  • Your safety net—limits losses
  • Set BEFORE entering the trade
  • Never move it farther away

📍 SL Methods

  • Structure-based (swing points)
  • Volatility-based (ATR × 1.5-2)
  • Fixed-distance (simple/beginner)

🎯 Take-Profit (TP)

  • Locks in your gains
  • Prevents giving back profit
  • Plan exit before emotions kick in

📍 TP Methods

  • Risk-Reward ratio (1:2, 1:3)
  • Structure-based (S/R levels)
  • Partial exits + trailing stop
🎓
Remember: Your SL and TP should be based on logic (chart structure, volatility, planned R:R)—not emotions or guesswork. The goal isn't to win every trade. The goal is to build the habit of setting logical SL and TP levels before you trade—and sticking to them.
📝 Practice Exercise
  • Open a demo trading account (MetaTrader, TradingView Paper Trading, or Binance Testnet)
  • Find a simple setup—a breakout or a pullback
  • Write down your entry price, stop-loss, take-profit, and R:R before entering
  • Execute the trade and let it play out—don't touch your SL or TP
  • Review: Did your SL make sense? Did your TP get hit? What would you do differently?
⚠️ Important Risk Disclaimer

Forex and crypto trading are high-risk activities. Most retail traders lose money, especially when using leverage. This course is for educational purposes only—not financial advice.

  • Practice extensively in demo accounts before trading real money
  • Never risk money you can't afford to lose
  • In the Philippines, only use BSP-registered VASP platforms for crypto
  • Avoid unregistered platforms and "too good to be true" promises
  • For real investment decisions, consult licensed financial professionals
🚀
Ready for the Next Step?
You are now ready to move to the next section, where you'll learn how to calculate the exact position size for every trade based on your stop-loss and risk tolerance. Let's keep going!