How to Place Stop Loss and Take Profit Correctly

Today, we will explore the most accurate way to place Stop Loss (SL) and Take Profit (TP) in Forex trading from a technical analysis perspective.

The first and most important rule is: always base your SL and TP on the timeframe (TF) you are trading. For example, if you are trading H1, your SL and TP must correspond to H1 price movements.

This guide is ideal for beginners and can also be applied to other markets such as Gold, Stocks, Oil, Coffee, and other commodities. If you want to understand why technical analysis works so well, check out our previous article Why Choose Technical Analysis.

The method I use is simple and can be summarized in two words: Swing Highs and Swing Lows.

Step-by-Step Process to Determine SL and TP

1. Identify your main trading timeframe.
2. Use your trading system to detect valid entry signals.
3. Determine the nearest swing highs and swing lows to your intended entry.
4. Adjust for spread and market noise.
5. Establish precise SL and TP levels.
6. Calculate the Risk-to-Reward ratio (R:R).
7. Enter the trade if the R:R is acceptable.
8. Skip the trade if the R:R does not meet your criteria.

Choosing the right SL and TP is critical because it decides whether a trade is viable based on R:R. For more foundational knowledge, you might also want to review Basic Forex Concepts.

Why Swing Highs and Swing Lows Are Used

• They often correspond to key support and resistance levels.
• They act as psychological barriers for traders.
• They reflect wave ranges in trending markets or price zones in sideways markets.
• A true breakout beyond these levels often leads to a significant price movement. Placing SL behind these levels is safer.
• Taking profits near these zones is generally reliable.

Swing highs and lows are fundamental for trend recognition. If you want to refine your trend detection skills, see our article How to Accurately Identify Forex Trends.

Rules for Placing SL and TP

For Buy Trades:

• SL = nearest swing low – noise
• TP = nearest swing high – noise

For Sell Trades:

• SL = nearest swing high + spread + noise
• TP = nearest swing low + spread + noise

Notes:

• Spread: average spread of your trading pair under normal conditions
• Noise: pip allowance for volatility, fake breakouts, or broker stop-hunting
• Swing High / Low: the nearest significant turning points to the current price

Typical noise values (adjust according to your experience):

• M15: 3–5 pips
• H1: 5–10 pips
• H4: 10–20 pips
• D1: 20–40 pips

Example: EUR/USD on H1

Suppose EUR/USD forms swing high #3 and starts falling. The nearest swing low is #2, and the nearest swing high is #3.

Buy Scenario:

• SL: below swing low #2 (1.16956 – 10 pips = 1.16856)
• TP: at swing high zone (1.17790 – 10 pips = 1.17690)

The trade hits TP at point #4. Subsequent opportunities appear at points #5 and #6.

Sell Scenario:

• SL: above swing high zone (1.17790 + 2 pips spread + 10 pips noise = 1.17910)
• TP: at swing low #2 + spread + noise (1.16956 + 2 + 10 = 1.17076)

This ensures the trade is not stopped out at intermediate points and reaches the intended TP.

Breakout Trap: At swing low #8, a major news release (FOMC) caused a false breakout. Price triggered stops before reversing to create high #9. Always account for noise and volatility during major news events. For more on handling unexpected price movements, see Volume – The Perfect Lighthouse for Accurate Forex Forecasting.

Important Notes on SL and TP

• SL and TP themselves do not determine R:R; your system and trading style do.
• SL minimizes losses, TP secures profits.
• Counter-trend trades typically have higher R:R; trend-following trades lower R:R.
• During high-impact news (NFP, FOMC), increase noise to prevent stop-hunting.
• Spread and noise vary by broker and timeframe. Gain experience to adjust accurately.
• This method works for trend-following trades and long-term positions. Move SL to new swing lows/highs after successful breakouts.
• For counter-trend entries where the system signal is a swing turning point, place SL directly behind the entry.

For more on trend dynamics and risk management, check Trend and Yin-Yang Theory.

Conclusion

This SL and TP method is reliable and beginner-friendly. Proper application helps reduce losses, maximize gains, and avoid being prematurely stopped out.

Share this guide if you find it helpful, and stay tuned for more practical Forex guides.

Thank you for reading.