Every trade you enter has two futures: the price at which you will admit you were wrong, and the price at which you will bank the profit. Those two prices are your stop loss and your take profit, and writing them down before you buy is what separates a plan from a hope. This guide walks through the arithmetic behind both levels, how to read the risk/reward ratio the numbers produce, and how to size a stop off volatility instead of a round number, using the same inputs the Stop Loss / Take Profit Calculator runs on.
What a stop loss and a take profit actually do
A stop loss is an order that closes your position automatically once the price reaches a level you set in advance. On a long it sits below your entry; on a short it sits above. Its job is to cap the downside of a single trade at a number you chose while you were still calm, so that a losing move cannot compound into a position you no longer know how to manage. A take profit does the mirror job: it is an order that closes the position once price reaches a level above your entry (below, for a short), locking in a gain instead of leaving it exposed to a pullback.
The reason both are worth setting before the entry rather than reacting in the moment is that, if you wait, you end up making the decision at the worst possible time. In the middle of a drawdown your instinct is to hold a little longer, and in the middle of a rally it is to let the winner run a little further; both impulses cost more than the level you would have placed at entry. Stopping out also defines your risk. Until you have a stop, you cannot compute how much the trade can lose, and without that number there is no sensible position size. The stop is the anchor the rest of the math hangs on.
Two ways to set the levels: percentage and price
Most calculators, including the one on this site, let you specify each level in one of two modes. In percentage mode you give the stop and the take profit as a percent of entry, and the tool converts them to prices. In price mode you give the absolute levels and the tool works backward to the percentages. Pick percentage mode when your rule is relative ("I risk 5% of entry"), and price mode when your level is defined by structure ("I exit below this support at 94.50").
Work it through on a long position: entry $100, position size 100 units, stop at 5% below entry, take profit at 10% above. The stop price is 100 × (1 − 0.05) = $95.00, and the take profit is 100 × (1 + 0.10) = $110.00. For a short the directions flip: with the same 5% and 10%, the stop sits at 100 × (1 + 0.05) = $105.00 and the take profit at 100 × (1 − 0.10) = $90.00. Notice that the percentages are identical in both cases; only which side of entry each lands on changes. That symmetry is exactly what the side selector in the calculator is for, and it is the first thing to set correctly, because getting the side wrong silently inverts every level.
Reading the risk/reward ratio and the break-even price
With the two levels set, the tool derives the risk/reward ratio, which compares what you stand to win to what you stand to lose. In the long example above the distance from entry to stop is $5 per unit, so with 100 units the risk amount is $500; the distance from entry to take profit is $10 per unit, a reward of $1,000. The ratio is reward divided by risk, $1,000 / $500 = 1:2, meaning you risk one dollar to make two. A 1:2 setup is a common minimum for a trade to be worth taking, because it keeps you whole or ahead even with a win rate below 50%: at 1:2 you break even with a win rate of only about one third, and anything above that is positive expectancy before costs. The Risk/Reward Ratio Calculator isolates that single comparison if all you want is the ratio.
The break-even price is the level where the trade, if it got there, would have lost or won nothing. For a long it sits above entry by the per-unit distance to the stop (here 100 + 5 = $105.00); for a short it sits below entry by the same distance ($95.00). The tool's break-even reflects price movement only; it does not add commission or spread, so a real account's break-even is a little farther from entry than the figure shown. Treat the displayed break-even as the price threshold, not the cost threshold.
Sizing the stop with ATR instead of a round number
A stop placed at a neat 5% can be either too tight or too loose depending on how much the instrument actually moves, and the fix is to size the stop off measured volatility. The standard measure is the Average True Range (ATR), which averages the true range over a window, typically 14 periods. The true range of a single bar is the largest of three: high minus low, the absolute gap from the prior close to the high, or the absolute gap from the prior close to the low. ATR is a pure measure of how far price travels in a period, so it scales the stop to the asset's current noise floor.
The common recipe is to place the stop a multiple of ATR away from entry, with 2 to 3 times ATR a typical band: 2× for a tighter, more reactive stop and 3× for one that tolerates more chop before it is hit. Suppose ATR(14) on a $100 stock is $4, which is 4% of price. A long with a 2× ATR stop sits at 100 − (2 × 4) = $92.00, an 8% stop; at 3× it would sit at 100 − 12 = $88.00. The benefit is that the same rule adapts: on a quiet instrument ATR is small and the stop is close, on a volatile one it is small in percentage terms of the move but still far enough out that normal noise does not shake you out. The ATR Stop Loss Calculator applies that multiple to a specific entry, and the ATR Calculator is where you get the underlying ATR value if you are working from raw prices.
Position size, the risk amount, and the risk percentage
The risk amount is what the trade loses if the stop is hit: the per-unit distance from entry to stop, times the position size. In the long example, $5 × 100 = $500. The risk percentage is that amount as a share of the position's value ($500 on a $10,000 position = 5.00%), which is another way of saying the stop was set 5% away. These two numbers are the bridge to position sizing, and the discipline is to work in reverse of the way people usually do: decide first how much of the account you will allow a single trade to cost, then let the stop distance determine how big the position can be. If you will risk 1% of a $10,000 account ($100) and your stop is $5 below a $100 entry, the size is 100 / 5 = 20 units, not 100. The Position Size Calculator does that inverse step and is where the risk amount and the position size should be reconciled together rather than picked independently.
How much to risk, and where the stop meets liquidation
Choosing the per-trade risk fraction is a judgment call with a wide safe band, but most systematic traders keep it between 0.5% and 2% of equity per position. The fraction should shrink as your edge becomes less certain and as positions become more correlated, and it is the one dial that most directly controls the size of your drawdowns. Sizing each unit bet off your historical win rate and payoff rather than a fixed percentage is the Kelly criterion, and the common practical move is to bet a fraction of the full Kelly number precisely because full Kelly is punishing on the variance. Keeping the per-trade risk modest is what lets a string of stops hit without doing structural damage to the account; for the same reason it is worth reviewing the maximum drawdown your strategy has produced before, because that number is a better prior for what a bad streak costs than any single trade is.
On leveraged or margin positions there is a second price that matters as much as the stop: the liquidation price, where the exchange closes you out for lack of collateral. The rule is simple and unforgiving, the stop must be closer to entry than the liquidation, otherwise you will be liquidated before your own stop has a chance to do its job and you lose the choice of exit. If the liquidation is uncomfortably close, the fix is to reduce leverage, not to move the stop. For the mechanics of where that price actually falls, see the liquidation price guide; set the stop first, then confirm there is a healthy gap to liquidation, and only enter once both are in place.