Stop loss and take profit: protecting yourself from emotions

Every trader knows that the real enemy is not the market, but himself. The fear of loss and the greed for gain are the two forces that most often lead to costly mistakes. This is why the simplest—but also most misunderstood—risk management tools exist: stop loss and take profit . Two automatic orders that are supposed to make trading more rational, but which, if poorly calibrated, end up amplifying the very thing they're supposed to contain: emotion.

Those who trade during the day and those who hold positions for longer

The difference between those who open and close a trade on the same day ( day traders ) and those who hold them for several days or weeks ( swing traders ) is fundamental. The former thrives on micro-movements: they trade on variations of even 0.2–1.0% , often with leverage, and therefore must set tight stop losses to avoid compromising their capital in a matter of hours. A timing error or sudden news can wipe out an entire day's profits in an instant.

Those who operate on longer time horizons, however, anticipate movements of 2–5% or more, and can therefore afford larger levels, allowing the price to breathe. But this very apparent "peace of mind" conceals a psychological risk: the illusion of having time to decide, which often leads to never intervening.

Small Levels: Precision or Trap?

Setting stop losses and take profits close together —for example, within 1% of the entry price—may seem prudent, but in volatile markets it's a common pitfall. Even a simple price "noise," a volatility candlestick, is enough to trigger the order and then see the market retrace its intended direction. This is the classic frustration of those who see their stop hit by "just a few ticks." On the other hand, tight levels require discipline and allow you to limit maximum losses : if a trader can maintain a 60% probability of success with the same profit and loss amounts (I'm simplifying, just to make the concept clear... let's consider it more than 50% because a portion goes to commissions and various management costs), they can grow steadily.

The key is not to set fixed stops, but adaptive ones , consistent with the asset's average volatility. If the DAX moves an average of 0.75% per day, a 0.3% stop might not make sense: it's like trying to slow down a sports car with the handbrake.

Large Levels: Space or Self-Deception?

At the other extreme are wide stops: -5%, -10%, or more . They are only useful if you're trading without leverage and with partially invested capital. They allow you to survive normal market fluctuations and avoid premature exits. But for those using leverage or low margins, a stop too wide can be equivalent to not having one at all: the risk becomes exponential.

The risks of not applying them

Having no stop loss or take profit means letting the market or emotions make decisions for us . Those without a defined stop tend to "hold" the position, hoping the market will recover, turning a small mistake into a deep wound. In 2022, with the Nasdaq's collapse of approximately 33% from January to October , many retail investors saw their losses double because they had no exit limits. The same happens with forex or commodities, where sudden movements of 2–3% overnight can wipe out a margin account.

Without a take profit, however, the risk is that you'll never be satisfied : the price hits the ideal target, but you wait "a little longer." The result is that you often close with a modest profit or even a break-even/loss.

The risks of applying them incorrectly

Blindly applying them can also be dangerous. Many traders set their stop loss at a standard distance—for example, always at -1%—without considering the stock's volatility, the macroeconomic environment, or its correlation with other assets. This is a mechanical, but not rational, approach. Stop losses should be a consequence of analysis , not a habit. Likewise, setting too rigid take profits risks stifling gains: if every trade closes with a modest +0.5%, but losses remain at -1%, even with a high success rate, you'll end up in the red.

Look at the chart, but understand the market

An even more profound mistake is to focus solely on the chart and ignore what's happening outside it. A technical pattern or a candlestick may seem promising, but if inflation data or a Fed speech comes out the next day, the context changes completely. Markets aren't colored lines : they're the sum of monetary policies, capital flows, and expectations. Those who focus solely on the chart risk confusing noise with signal —and setting stops or take profits at the worst possible point.

In summary

Stop-loss and take-profit orders aren't tools for predicting the future, but for surviving the present. They help manage uncertainty, not eliminate it. The real benefit comes from conscious use: levels consistent with volatility, calibrated to your time horizon, and always accompanied by a comprehensive view of the market. Because the most effective protection isn't an automatic order: it's the clarity of those who can separate price from emotion.