Stop loss and take profit
What you learn in 3 minutesThis lesson shows how two instructions attached to a position decide your result before the market moves: a stop loss closes the trade at a loss you chose, and a take profit closes it at a profit you chose. On a 0.10 lot EUR/USD trade, a 20 pip stop works out at about KSh 2,600, and a 40 pip target at about KSh 5,200, so the two numbers can be compared before you click buy or sell.
One trade, two exits: 20 pips down and 40 pips up
| Step | Amount | Note |
|---|---|---|
| Position size | 0.10 lots | One tenth of a standard lot, so the pip value is one tenth of the standard lot figure. |
| Value of one pip | about KSh 130 | One pip on a standard lot is 10 units of the quote currency; at a USD to KES rate of about 130, one tenth of that is about KSh 130. |
| Stop loss distance | 20 pips | The loss you accept in advance, set below the entry price. |
| Loss if the stop is hit | about KSh 2,600 | 20 pips multiplied by about KSh 130 per pip. |
| Take profit distance | 40 pips | The profit you aim for in advance, set above the entry price. |
| Profit if the target is hit | about KSh 5,200 | 40 pips multiplied by about KSh 130 per pip. |
The broker may round the pip value, charge a spread or commission on top, and quote a slightly different USD to KES rate, so the final figures can differ from these.
The mistake people make here
Many beginners open a trade with no stop loss and watch a small loss grow while hoping the price turns back. Others move the stop further away once it is close, which turns a planned loss into an unplanned one. Set both levels when you open the position, and treat them as part of the order rather than as suggestions. If the market reaches your stop, the trade closes and the loss stays at the size you chose.Check yourself
A 0.10 lot EUR/USD trade has a stop loss 30 pips away. If one pip is worth about KSh 130, what is the loss if the stop is hit?
30 pips multiplied by about KSh 130 per pip gives about KSh 3,900.
The same trade has a take profit 60 pips away. What is the profit if the target is hit?
60 pips multiplied by about KSh 130 per pip gives about KSh 7,800.
If the stop is 30 pips and the take profit is 60 pips on the same 0.10 lot trade, what is the ratio of possible profit to possible loss?
KSh 7,800 divided by KSh 3,900 gives a ratio of 2 to 1.