Stops and targets
Before you get in, pick where you're wrong and where you take profit.
Two prices you pick before you start
Every trade needs two exits planned before you get in:
- A : the price where you admit you're wrong and get out with a small loss.
- A : the price where you take your profit.
It's like a bike ride. You know where you're going (the target), and you know where you'll turn around if the road is blocked (the stop).
Where does the stop go?
A stop isn't a random number like "I'll lose $50 and then quit." It goes at the price that proves your idea wrong.
In the picture, price dipped, made a low around $48.40, and bounced. A trader buys at $50 because they think buyers are back in control. If price falls below that low again, the idea was wrong. So the stop goes a little below the low, at $48.
- For a buy, the stop usually goes a little below a recent low or a level.
- For a sell (a short), the stop usually goes a little above a recent high or a level.
Why "a little" past it? Price often pokes just past an obvious low before turning. A stop placed exactly on the low gets knocked out by a tiny wiggle.
Where does the target go?
The target usually goes where price might stop moving your way, like the last high or a resistance level above. In the picture, the target is $54.
Some traders take half their profit at the first target and let the rest keep going. Either way, decide before you click.
Stop first, then size
Once you know the stop, you know the stop distance: $50 minus $48 = $2. The position sizing recipe from the last lesson turns that into how many shares to buy.
Place them as real orders
Most trading apps let you place the stop and the target as real the moment you get in. Then even if your internet drops or you get distracted, your exits still work. A stop that lives only in your head is easy to "forget" when the trade is losing.
What goes wrong
- Moving the stop farther away because price is getting close. This is the number one way small losses turn into big ones. Moving a stop to lock in profit is fine. Moving it to dodge a loss is not.
- No stop at all. "It'll come back" is how accounts get wiped out.
- A stop that's too tight. Normal wiggles knock you out, and then price goes your way without you.
- Expecting a perfect exit. In a fast market, a stop can fill a bit worse than its price. That's .
Remember
- Pick your stop and target before you get in.
- The stop goes where your idea is proven wrong, with a little extra room.
- The target goes where price may run out of steam.
- Never move a stop farther away to avoid a loss.
Check yourself
1. On a buy trade, where does the stop usually go?
2. Price is getting close to your stop. What should you NOT do?
3. Why place your stop as a real order?
Next lesson: Risk and reward on each trade
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.