How to Set Stop Loss and Take Profit with Spread

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In the world of trading—whether in forex, stocks, or cryptocurrencies—risk management is the cornerstone of long-term success. Two of the most essential tools for managing risk and securing profits are stop loss and take profit orders. When used effectively, these tools help traders minimize losses and lock in gains automatically, without emotional interference. However, many traders overlook a critical factor that can significantly impact their profitability: spread.

The spread—the difference between the bid and ask prices—can subtly distort the actual risk and reward of a trade if not properly accounted for when setting stop loss and take profit levels. This article explains how to correctly set these orders in relation to market spread, especially when using platforms like MetaTrader 4 (MT4), and provides practical code examples to ensure your strategy remains balanced and profitable.

Understanding Stop Loss and Take Profit

A stop loss is a predefined price level at which a trade will automatically close to prevent further losses. For example, if you enter a buy trade at 1.2000 and set a stop loss at 1.1990, your position will close if the price drops to that level, limiting your downside.

Conversely, a take profit order locks in gains by closing the trade when the price reaches a favorable level. If your take profit is set at 1.2010 in the same trade, the position closes automatically once that price is hit.

When used together, these orders create a disciplined trading framework. But their effectiveness hinges on how they are referenced relative to entry price and market spread.

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The Problem with Using Bid Price as Reference

Many traders follow the common recommendation from the MQL4 manual (the scripting language behind MT4) to use the bid price as the reference point for setting both stop loss and take profit levels—even for buy orders. While this may seem logical, it introduces an imbalance due to the spread.

Let’s illustrate this with an example:

At first glance, this appears to be a 1:1 risk-reward ratio. But here's what actually happens:

Despite aiming for equal risk and reward, you're risking 50% more than you stand to gain. Over time, even with a 50% win rate, this imbalance leads to net losses.

The Solution: Use Entry Price as Reference

To maintain a true risk-reward ratio, always set your stop loss and take profit levels relative to your actual entry price:

This ensures symmetry in your risk and reward.

Using the same example:

Now:

✅ True 1:1 risk-reward achieved.

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Handling Spread Widening in Volatile Markets

While using entry price as reference solves the imbalance issue, there’s a crucial caveat: spread widening.

During high-volatility events—such as economic news releases—brokers may experience temporary spikes in spread. If you place an order when the spread is abnormally wide, you immediately start the trade at a disadvantage.

To protect against this, incorporate spread checks into your trading logic, especially if using automated trading systems (Expert Advisors).

Below is optimized MQL4 code that ensures safe order placement:

bool OpenBuy()
{
   RefreshRates();

   double Lots = 0.1;
   int LotDigits = (int)-MathLog10(SymbolInfoDouble(Symbol(), SYMBOL_VOLUME_STEP));
   double LotSize = NormalizeDouble(Lots, LotDigits);

   double MaxSpreadInPoints = 50;
   double Spread = Ask - Bid;
   if(Spread > MaxSpreadInPoints * Point)
      return(false);

   int SlippageInPoints = 20;

   double TakeProfit = NormalizeDouble(Ask + 10 * PIP, Digits);
   double StopLoss = NormalizeDouble(Ask - 10 * PIP, Digits);

   Ticket = OrderSend(Symbol(), OP_BUY, LotSize, Ask, SlippageInPoints,
                      StopLoss, TakeProfit, "Spread Test", MagicNr, 0, Green);

   if(Ticket == -1)
   {
      Alert("Buy Error: ", GetLastError());
      return(false);
   }
   return(Ticket >= 0);
}

bool OpenSell()
{
   RefreshRates();

   double Lots = 0.1;
   int LotDigits = (int)-MathLog10(SymbolInfoDouble(Symbol(), SYMBOL_VOLUME_STEP));
   double LotSize = NormalizeDouble(Lots, LotDigits);

   double MaxSpreadInPoints = 50;
   double Spread = Ask - Bid;
   if(Spread > MaxSpreadInPoints * Point)
      return(false);

   int SlippageInPoints = 20;

   double TakeProfit = NormalizeDouble(Bid - 10 * PIP, Digits);
   double StopLoss = NormalizeDouble(Bid + 10 * PIP, Digits);

   Ticket = OrderSend(Symbol(), OP_SELL, LotSize, Bid, SlippageInPoints,
                      StopLoss, TakeProfit, "Spread Test", MagicNr, 0, Red);

   if(Ticket == -1)
   {
      Alert("Sell Error: ", GetLastError());
      return(false);
   }
   return(Ticket >= 0);
}

This code:

By filtering out trades during high-spread conditions, you avoid skewed entries and maintain strategy integrity.

Frequently Asked Questions (FAQ)

Q: Why does spread affect stop loss and take profit accuracy?

Spread creates a gap between where you enter a trade (ask for buys) and where the market is priced (bid). If SL/TP levels are based on bid price for buy trades, the actual distance from entry becomes unequal—leading to higher losses than intended.

Q: Should I always avoid trading during news events?

Not necessarily—but you should monitor spread closely. High volatility can offer opportunities, but widened spreads increase trading costs and risk. Use spread filters in your EA or manually delay entries until conditions stabilize.

Q: Can I automate spread-aware trading on other platforms?

Yes. While this example uses MQL4/MT4, similar logic applies to any platform supporting algorithmic trading (e.g., Python with brokers’ APIs, TradingView Pine Script). Always anchor SL/TP to your execution price.

Q: Does this method work for all asset classes?

Absolutely. Whether trading forex pairs, crypto assets like BTC/USD, or stock CFDs, the principle remains: align stop loss and take profit with your actual entry point to preserve risk-reward balance.

Q: What happens if my broker doesn’t allow tight stop loss settings?

Some brokers impose minimum distance requirements for pending orders or SL/TP levels. Always check your broker’s specifications and adjust your strategy accordingly—this might mean adjusting position size rather than compromising on stop distance.

Final Thoughts

Accurate stop loss and take profit placement isn’t just about choosing price levels—it’s about understanding how market mechanics like spread influence your real-world outcomes. By anchoring your orders to your actual entry price and filtering out trades during excessive spread conditions, you ensure fairness in every trade.

Whether you're coding an Expert Advisor or placing manual trades, this small adjustment can make a massive difference in long-term profitability.

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