Stops and Profit Targets: Risk-Management Basics
Long-term survival depends heavily on stops, targets and risk management, alongside entry decisions. Build the habit of deciding where exposure ends before opening it.
What is a stop-loss?
A stop aims to exit with a controlled loss when the trade thesis is wrong. Planning it beforehand reduces emotional delay and can place the intended exit well before forced liquidation, subject to actual execution.
Where does a profit target fit?
A target realizes profit at a planned level. This guide emphasizes a potential gain larger than the planned loss, expressed through risk/reward.
Across ten trades, four winners produce 4 × 2% = +8%, while six losers produce 6 × 1% = −6%.
The arithmetic total is +2% before costs.
A favorable payoff ratio can offset a lower win rate under these assumptions.
Determine risk before position size
Start with the amount you can afford to lose on the trade, rather than choosing leverage first. The guide cites 1–2% of account equity per trade as a common reference, not a universal recommendation.
- A KRW 10 million account with a 1% risk budget allows a planned KRW 100,000 loss.
- Use this amount and the stop distance to derive position size and assess required margin.
- Limiting each planned loss helps preserve capital for subsequent opportunities.
Common beginner mistakes
- Leaving no stop and hoping for recovery until liquidation.
- Placing the stop too close to liquidation or without considering ordinary volatility; execution room and market movement both matter.
- Taking profits very quickly while allowing losses to grow, reversing the intended payoff relationship.
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