How to manage your trades with stop-loss and take-profit orders

Trading crypto involves taking a lot of risks, requiring traders to use different tools to manage their risks, reduce losses and secure profits. Stop-loss and take-profit orders are also used for risk management, so you need to understand how they work.


If you want to up your crypto trading game, you need to know more about these, learn how to use them and figure out the strategies that you can use in executing them.


What are Stop Loss and Take Profit Orders?

A stop-loss (SL) is a limit order that indicates how much loss you are willing to accept on a trade. It prevents you from making additional losses on a trading position.

A take profit (TP) works the exact opposite of a stop loss. It specifies the price to close a position for profit. When you have a take profit order, the trading platform you are using will automatically close your position when the price level is reached.

Stop loss and take profit orders are both limit orders, meaning they are set at predetermined prices and if the conditions are met, the orders are triggered. It is of course also possible that the price never reaches the price you specified and the order is not activated.

These tools are beginner friendly and are usually effective for short term trading.

Why should you use Stop Loss and Take Profit?

There are many reasons to use stop loss and take profit orders; among them are the following:

To prevent emotional and impulsive trading

Having specific stop-loss and take-profit prices reduces the tendency to make emotional decisions when closing trades. It is normal to have situations where trades are on the losing side for a long time and later close in profit. Relying on emotional triggers would often cause novice traders to close such trades too early.

In addition, the lack of a predefined profit target can lead to you closing profits too early or letting a trade run too long. Relying on gut feelings to close trades can affect your trading psychology, causing emotions such as fear, greed, doubt, etc., to lead to making the wrong moves.

For good risk management

Using strategic stop-loss and take-profit orders when planning your trades also helps maintain a tight risk management strategy. The tools help you define your risk-reward ratio, the amount of risk you are willing to take in trading relative to the potential reward.

To stay off the market

Instead of staying and following the market to know the right time to close a trade at a loss or profit, these tools have become useful for these purposes. In addition, you don’t have to watch the charts all day after the trade is executed, because you can always determine your SL and TP levels in advance and continue with other activities.

They are completely free to use

There is usually no charge for using the SL and TP. Exchanges have them as free to use tools for all traders and investors. However, some exchanges may require you to subscribe to a subscription to access more complex crypto order types.

Strategies for Setting Stop Loss and Take Profit Targets in Trading

Where you set your stop loss order depends on how much you are willing to lose if a trade is not in your favor. It should be placed in a strategic point where it is not activated too early and at the same time not too far so that you do not lose too much.

You should also not go beyond the level of risk you have set in your trading plan.

Price volatility and swings are some of the market factors to consider when setting your stop-loss. You don’t want to put it in a place where random market swings and noise can easily trigger it.

When you go short (sell), you must set your stop loss above the trade execution point; if you go long (buy) it should be below the execution price.

More generally, traders use their risk-reward expectations to determine their take-profit level. It makes no sense to set a profit target that yields a reward that is lower than the potential loss.

In addition, you should also consider the general market conditions using tools such as price action, support and resistance, technical indicators and other useful factors to know where the price is likely to struggle or reverse.

With all this in mind, let’s look at some useful strategies for setting stop loss and take profit levels.

Support and Resistance Levels

The support and resistance levels are key price levels where the price is likely to recover. A support level will stop the price from moving further down, while a resistance level will stop it from moving further up.

In a short position, the SL is usually below the resistance, while the TP is above the support. However, in a long position, you should place the SL above the support and TP before the resistance.

Trading Volatility

Here you can use the volatility of the market to determine where to place your stop loss order. This strategy requires you to use the volatility of the market to determine where to set your SL. The Average True Range (ATR) indicator allows you to determine how volatile a crypto market is and place the SL at a point that the market is unlikely to reach.

Knowing the average market movement over a period of time can also help you determine the right place to place a TP.

Risk per transaction

Having a specific amount that you are willing to risk per trade is a simple risk management strategy that can help you place a stop-loss. This approach requires that you have a certain amount that you are willing to risk per trade. The amount can be calculated as a percentage of your entire capital.

For example, let’s say you plan to risk only 1% of your capital on any trade, no matter how promising it is. This means that you set your stop loss so that you only lose 1%. So if you have a $5,000 account, you won’t lose more than $50 on a trade.

To set your TP with this strategy, you need to use a price level that will give you a profit greater than the potential loss. Setting your TP based on the ratio is good if you have a specified risk-reward ratio. For example, if your risk-reward ratio is 1:3, you should set your TP at a price that will give you a profit that is 3% higher than the potential loss amount.

Trading Indicators

Traders use a variety of indicators to determine where to place their SLs and TPs. They use the Relative Strength Index, Moving Averages, Bollinger Bands and many more.

The main idea is that the stop loss should be placed where it cannot be easily triggered, and your take profit should be where you know the price is likely to reach, while still considering your risk-reward ratio, trading goals and other market factors.

Be dynamic with your approach

Many short-term traders rely on stop-loss and take-profit orders to close trades. These orders have proven to be reliable in the crypto markets and other financial markets.

These tools help you focus on your trading exit and risk management strategies. They are also more effective when combined with other risk management practices.

We encourage you to be dynamic when setting up your SL and TP. It is always a good idea to use a combination of strategies based on market conditions. There are no clear rules governing how you set them up, and it’s fine to have a unique strategy as long as it gives you the result you want.

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