Crypto Trading 101: What Is Stop-Loss and Take-Profit?
How to Calculate Stop-Loss and Take-Profit Levels
If you’re new to crypto trading, you should start asking “what is stop loss and take profit?” One of the biggest mistakes traders commit is blowing their entire account due to emotional trading and not knowing when to exit.
Two of the most crucial aspects for novice crypto traders to grasp while learning technical analysis are Stop-Loss (SL) and Take-Profit (TP) levels. SL and TP, as their names imply, help traders choose the safest and most profitable ways to get out of a trade.
Methods for risk mitigation, like SL and TP level, are in place to limit losses or maximize gains. They are utilized in both conventional assets, such as stocks and Forex, and in crypto trading.
What is a Stop Loss and Take Profit?
Setting up SL and TP levels is a powerful practice in crypto trading. To implement this technique, a trader must gather relevant data and insights to know how to calculate stop loss and take levels. SL and TP are crucial in cryptocurrency trading, as any seasoned investor can attest. The ability to choose an entry price objective is a standard function of nearly all exchanges.
The Take-Profit signal causes a sale to occur automatically after a position achieves a predetermined profit threshold. However, not every deal ends up in the trader's benefit. In this situation, the SL signal will activate and the position will be sold automatically in response to a steep decline in price.
To prevent impulsive trading, stop-loss and take-profit (SL/TP) levels are implemented. Considered a crucial tool for mitigating risk, it has gained widespread use in the cryptocurrency market.
Establishing an SL price objective in advance is one strategy to protect oneself from suffering a loss in financial standing. Once the crypto’s price hits a predefined target, it will be automatically liquidated, which closes the order. On the other hand, a TP order is the point at which investors automatically cash out their earnings in response to an automated order.
When the price reaches these targets, the position is automatically liquidated, freeing them from the obligation of constantly monitoring markets and making market orders. As an illustration, the functionality of the Stop Order in Binance Futures combines the SL and TP orders. Using the user’s trading history, the computer is able to determine the SL and TP setup in a given market.
Advantages of Setting an SL and TP Order
1. Managing Risks
In essence, professional players who accurately estimate the ideal SL and TP limits can uncover significant profits. They are able to see the characteristics of price movements on any given day. They know what is “take-profit” and when to sell at the right time. Using these limits as risk management protocols, players are able to grow their portfolio without indulging in too much risk. By consistently prioritizing deals with lower risk, you are doing more than just keeping your portfolio from being completely wiped out; you’re also ensuring that you will get to trade another day. Due to this conservative mindset, almost all strategies involve setting up effective SL and TP price targets.
2. Avoid Impulsive Trading
When it comes to crypto trading, self-control is always crucial. As much as possible, traders want to stay objective all the time, insofar as they even create a self-executing predefined strategy. When traders are under the effect of stress, anxiety, greed, or any other extreme emotions, it’s easy to become a victim of impulse and emotions. Intense feelings can cloud a person's judgment, leading to poor trading choices. By asking “what does ‘stop-loss' mean?”, you’re also minimizing the risks and increasing your chances of earning.
3. Risk and Potential Gain Analysis
Analyzing SL and TP levels can also provide an insight into a trader’s gain-loss ratio. The risk/reward ratio compares the potential gains relative to the risk taken by the trader. It's ideal to make transactions when the possible rewards surpass the possible losses, which translates to a lower ratio of risk to reward.
Risk/Reward Ratio can be identified by subtracting the buy price from your chosen SL level. You can then multiply the result to the difference of TP level minus your buy Price.
Placing SL and TP Targets
Traders analyze the right SL and TP targets in many ways. However, the ultimate goal is still to analyze the data and formulate a more prudent take-profit strategy. Here are some of the most popular strategies experts employ when placing their SL and TP targets.
1. Support and Resistance Levels
The increase and decline of crypto markets tend to be sustained or rejected by traders' sentiments at certain points of time. These points create two popular levels on the chart:
- SUPPORT sustains the current market sentiment, supporting the buying pressure every time the market slightly falls. As the market approaches the support line, selling pressure is relieved and buying activity resumes again.
- There is a ceiling above which the price of cryptocurrency can’t rise because the selling pressure rejects the price incline. In general, bull markets lose steam when prices hit previously established points of RESISTANCE.
Using support and resistance as points of reference, a trader can analyze where the cryptocurrency market is currently at. These lines serve as warning signals, which allow traders to predict where prices are going in the near future. Therefore, it would be easier to identify the perfect time to buy or sell.
Aside from predicting the flow of price volatility, they also determine the ideal SL and TP levels. Typically, the support provides a signal to stop loss. The rejections, on the other hand, can trigger traders to take profit. Normally, the SL and TP levels are placed on top or just below these areas to leverage the breakouts or breakdowns that are about to happen.
2. Moving Averages (MA)
This indicator, in its simplest form, plots the average value of a cryptocurrency over a specified time frame. MA smooths out price data and eliminates market fluctuations and inconsistencies.
Moving averages, both simple and exponential, are considered one of the most useful indicators in determining optimal SL and TP levels. When attempting to predict a trend, EMAS gives greater weight to more recent prices. Thus, it is more responsive to fluctuations in market prices. On the other hand, other traders still rely on simple moving averages, especially when it appears to be respected as a support or resistance level by the majority.
Typically, traders use moving averages as a point of support and resistance. Therefore, they can be used to place SL and TP levels with respect to the established support and resistance. While there are a lot of moving averages that can indicate support or resistance, be sure to keep an eye on the ones being constantly respected by the buyers and sellers.
3. Percentage Method
In this method, the use of an automated crypto trading journal is highly encouraged to instantly place the ideal SL and TP targets. A common alternative to technical indicators for determining SL and TP levels is the use of percentages. In this case, traders arrive at a fixed price level based on a tolerable percentage threshold of risk they’re willing to take. For example, traders may set their SL level when the market moves 6% up or down. For traders without much background in using candlestick chart indicators, the percentage method is recommended because of its simplicity.
4. Moving Average Convergence Divergence
MACD is used to determine a price action’s trend, momentum, or potential reversals. Protecting your position may also be accomplished by making use of the MACD as the primary indicator to locate the SL and TP levels.
When entering long trades, the SL target should be placed under the previous low of the candlestick. If you engage in short-term trading, you may set your SL level at a price that is higher than the previous peak. Your position will be terminated automatically if the price movement generates a lower low on a lengthy order or a higher high on a quick transaction.
The MACD indicator is one of the easiest to read when predicting the momentum of the price. However, it is not always accurate, especially when used on volatile markets like cryptocurrency. Therefore, many expert traders use MACD to confirm their decisions, such as when placing SL or TP targets.
Crypto Trading With Less Risk and More Rewards
Risk management plays a crucial role in formulating a successful trading strategy. However, it’s important to remember that SL and TP levels are unique to each trader, and they do not guarantee a profitable trading strategy. Instead, they serve as a guide for a better decision-making process, making your trades more systematic.
There are many other ways to determine what is take profit and stop loss level that best suit your entry price. By reading indicators and analyzing trading data, one can easily identify the right time to exit a losing position or cash out potential profits. It's smart trading practice to employ your own risk management techniques. But, as you progress in your crypto trading journey, it’s always important to explore and learn better strategies or trading tools.
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