Stop-loss
Stop-loss can be defined as an advance order to sell an asset when it reaches a particular price point. It is used to limit loss or gain in a trade. The concept can be used for short-term as well as long-term trading. This is an automatic order that an investor places with the broker/agent by paying a certain amount of brokerage. Stop-loss is also known as ‘stop order’ or ‘stop-market order’. By placing a stop-loss order, the investor instructs the broker/agent to sell a security when it reaches a pre-set price limit.
In case of a stop-loss order, the trading company or broker looks at the trading discipline to help the investor cut losses by the current market bid price (i.e. the highest price for the stock at any point of time at which the investor wants to place a bid), and vice-versa, while selling a stock.
For example, if investor ABC wants to place a bid for shares of XYZ company at a certain price point, he/she would instruct his/her brokerage to set the limit against the stock purchase. When the stock reaches the set bid price, an order will be executed automatically to purchase the same.
If you already own the shares of company X and want to sell them, you would ask your broker to sell them when the price reaches at certain high or low. Accordingly, an automatic order will get triggered once the price range matches the set limits.
A stop-loss order is basically a tool used for short-term investment planning. It is used when the investor doesn’t want the pressure of monitoring a security on a day-to-day basis. The trade gets triggered automatically and the limits are decided in advance. This can be very helpful for small investors.
Take profit
A take profit order automatically closes an open order when the price reaches a specified threshold.
It is an order used by currency traders to automatically close their position once a certain profit has been made.
Although it halts any further advance in profit, it guarantees a specific profit after a level has been hit.
Take profit order are use to lock in profit. For example, if you are long USD/JPY at 110. 50 and you want to take your profit when the rate reaches 111.00, you will set this rate as your take-profit level.
If the bid price touches 111.00, the open position is closed automatically securing your profit.
Trades are closed at the current market rate, but in a fast-moving market there may be a gap between this and the take-profit rate you had set.