Stop loss and take profit
What you learn in 3 minutesStop loss and take profit are two prices you attach to a position before it opens. The stop loss closes the position at a loss you chose in advance. The take profit closes it at a profit you chose in advance. On a 0.10 lot AUD/USD position, a 20 pip stop loss is about A$20 and a 40 pip take profit is about A$40. This lesson shows where those numbers come from.
A 0.10 lot AUD/USD trade with a 20 pip stop and a 40 pip take
| Step | Amount | Note |
|---|---|---|
| Position size | 0.10 lots | One tenth of a standard lot. A standard lot is 100,000 units of the base currency. |
| Entry price | 0.6640 | The AUD/USD rate used in this example. |
| Value of one pip | A$1 | One pip on one standard lot is 10 units of the quote currency. On 0.10 lots that is 1 unit, which is A$1 when the quote currency is the Australian dollar. |
| Stop loss distance | 20 pips | The distance from entry to the stop price you set. |
| Loss at the stop | A$20 | 20 pips x A$1 per pip. |
| Take profit distance | 40 pips | The distance from entry to the take profit price you set. |
| Profit at the take profit | A$40 | 40 pips x A$1 per pip. |
The broker may round the pip value, quote a slightly different price, and charge a spread or commission on top. Those charges vary between brokers, so check the costs on the platform before you trade.
The mistake people make here
The common mistake is choosing the stop distance first and the position size second. That reverses the order. If the stop is 20 pips and the loss you can accept is A$20, the position size must be 0.10 lots. If the stop is 40 pips, the same A$20 loss means 0.05 lots. Decide the money you are willing to lose, then set the stop where the chart says the idea is wrong, then work out the size. Many platforms let you enter the stop and the size together, so the A$ loss is shown before you open the trade.Check yourself
On 0.10 lots of AUD/USD, a stop loss is 15 pips away. What is the loss in A$?
One pip on 0.10 lots is A$1. 15 pips x A$1 = A$15.
On 0.10 lots of AUD/USD, a take profit is 60 pips away. What is the profit in A$?
One pip on 0.10 lots is A$1. 60 pips x A$1 = A$60.
You will accept a loss of A$30. The stop is 20 pips away. What position size keeps the loss at A$30?
A$30 / 20 pips = A$1.50 per pip. One pip on 0.10 lots is A$1, so A$1.50 per pip is 0.15 lots.