Break even point
Family III · Risk
Not to be confused with stop loss, take profit, risk reward ratio.
Break even point is the price at which a trade's net result is zero, after all costs are deducted. It is not the same as the entry price: commission, spread and any financing charges shift the point away from the entry in the direction the market must move before the position becomes profitable. The distance between entry and break even point is therefore a cost, expressed in price terms.
How the point is calculated
For a long position, the break even point equals the entry price plus total costs divided by position size. For a short position, it equals the entry price minus the same amount. Costs typically include round-trip commission, the spread paid on entry and exit, and any overnight financing accrued while the position is held.
Because costs vary by instrument, broker and holding period, the break even point is specific to each trade rather than a fixed property of a market.
Worked example
Why it matters
The break even point defines the threshold between a losing and a winning trade. A position that is above the entry price but below the break even point is still a net loss. Traders use the point to set minimum price targets and to judge whether a stop placed near entry would lock in a loss after costs.
Moving a stop to the break even point is a common technique, but it does not guarantee a zero outcome: slippage on the closing order can push the realised result below the calculated point.
Often confused with
- stop loss
- A stop loss is a resting instruction to close a position once the market reaches a specified trigger price, intended to cap the loss on that position.
- take profit
- A take profit is a closing instruction attached to an open position that exits the trade once the market reaches a specified price, locking in a gain.
- risk reward ratio
- The risk-reward ratio is a comparison of the amount of capital risked on a trade to the amount of profit targeted, expressed as a quotient or a ratio such as 1:2.