Take Profit · Stop Loss
Selling to lock in a gain is taking profit; selling to limit a loss is stopping out — both are rules that decide "when to sell" in advance to keep emotion out of trading.
Take profit = sell once the targeted gain is reached, locking in the return
A stop-loss rule keeps the loss on one holding from growing beyond what you can bear.
In plain terms
Taking profit means "selling when you're up, to lock in that gain," and cutting loss means "selling when you're down, before the loss grows bigger, to stop it there." Both are about deciding "when to sell" ahead of time.
People tend to get greedy when they're up — "maybe it'll go higher" — and to put things off when they're down — "it'll come back." Taking profit and cutting loss are ways of setting rules in advance so those feelings don't take over.
What it tells you
These rules point to a truth about investing: selling is harder than buying. Deciding when to sell in advance cuts down on emotional trading and keeps a single large loss from wiping you out.
Cutting loss in particular is "a safeguard for when your judgment turns out to be wrong." Admitting the loss and ending it is often better than holding on and letting it grow.
Formula
Take profit = sell once the targeted gain is reached, locking in the return Stop loss = sell once the set loss limit is hit, preventing a larger loss
What high or low means
A stop-loss rule keeps the loss on one holding from growing beyond what you can bear. A take-profit rule reduces the chance of letting greed carry away a gain you already had.
That said, if the stop-loss line is set too tight, even a brief swing triggers a sale; if it's too loose, it doesn't work as a safeguard. Wherever you place the line, this trade-off between the two directions appears.
There is no "correct number" for taking profit or cutting loss. What percentage to sell at differs by person, by stock, and by strategy, so copying someone else's threshold may not fit you. (This explains trading principles; it does not recommend any particular trade.)
Prices rebounding after you cut a loss, or rising further after you take a profit, happen all the time. The reason for sticking to a rule is not "being right every time" but "avoiding a big failure."
Frequent cutting and profit-taking increase trading costs and taxes. The tighter your rules, the more trades you make.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see SEC-filing-based financial metrics alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.