Take profit and Stop Loss

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24.12.2021 09:39
Take profit and Stop Loss

    Trading cryptocurrencies is not easy. Learning how to make a profit requires knowledge and practice, and even better, an experienced mentor.  You also need to be able to use the basic tools available on most trading platforms (which is what asset trading is professionally known as, and the person engaged in this activity is called a trader, respectively).

    In this article we will analyze such tools as Stop Loss and Take Profit - what they are, why they are needed and when they are useful.  They are considered basic and their mastery is required for any trader.

    Order types

    To buy or sell an asset, such as Bitcoin, you need to place an appropriate application on the trading platform. These are known as orders. Orders, in turn, are divided into two main types:

    1. Market orders.They are executed instantly, at the current price. For example, placing a market order to sell a cryptocurrency will cause it to be sold immediately to another bidder who is buying at the same time. In this case, the trader can only speculate on the price at which the order will be executed, as asset values are constantly bouncing up and down. However, orders are usually executed at the price the user sees on the chart at the time the order is placed
    2. Pending orders.

      Orders of this type are not executed immediately, but only after the price reaches a certain point. For example:

    • Bitcoin is traded around $55,000;
    • The trader places a pending sell order at $54,000;
    • If the price reaches that level, the order will be executed; if not, it will remain inactive until the user cancels it.

    This is the type of order that includes take profit and stop loss. And while the mechanics of a market order are simple and intuitive for anyone, with pending orders things are a bit more complicated. That is why this article is written - its study will help us master this tool, or at least understand the principles of its work.

    What is a Take Profit

    Let's take a closer look at what a take profit is. For those new to the cryptocurrency market, understanding how to use it will help make trading more profitable and comfortable.

    Take Profit (also referred to as TP) translates to "take profit". Orders of this type are placed when the trader has an open trade position. The purpose of Take Profit orders is to set a specific price target, at which an asset will be sold with a pre-planned profit.

    For example:

    • The trader bought 1 Bitcoin at $50,000;
    • The profit he wants to make after closing the position is 10%;
    • He needs to sell the Bitcoin for $55,000 (10% of 50,000 is 5,000) to achieve the goal.

    In this case the trader sets the take profit at $55,000. And if his expectations are met, when the price reaches this level, the order will be executed automatically. Even if the user is now away from the computer/smartphone, and doing other things.

    When Take Profit is used

    Take Profit is usually used in two main scenarios:

    1. When a trader wants profits to be locked in in their absence. Not everyone has the ability to constantly monitor the chart, and close trades manually. Also, a trading session can be long - it is already past his bedtime, but the trader expects that the price will reach a certain level in the next few hours. In this case he just sets Take Profit and goes to bed knowing that profit will be fixed automatically.
    2. If the market is highly volatile. Volatility is the change in price of an asset during a certain period of time. The more the price jumps up and down, the higher the volatility.

     

    In a highly volatile market, which is what the cryptocurrency market is right now, asset prices are constantly changing. The level at which a trader wants to sell an asset and lock in a profit may be reached for just a few seconds, after which the price will roll back down again.

    Under such conditions, you may not be able to close the trade manually using a market order. 

    Therefore it is possible to set Take Profit on a desired price level in advance.

    Thus, Take Profit is not only a tool for those who cannot keep track of the charts all the time and always be ready. All traders face the necessity of its usage, but some more often and some less often, depending on the trading strategy.

    What is a stop loss

    Stop Loss (also known as SL) is another type of pending order. The name is translated from English as "stop loss". Like Take Profit, Stop Loss is set by traders who already have an open trade position. But not in order to lock in profits, but to minimize losses.

    Let's take the following situation as an example:

    • A trader bought 1 Bitcoin coin at $50,000;
    • The trade was opened in anticipation of growth, but due to the unpredictability of the market, the price of the asset may fall, and quite strongly;
    • The trader does not want to lose a significant part of the deposit if his guesses about the further price movement turn out to be wrong;
    • The trader has decided that he is ready to lose no more than 10% of the amount used to open the trade;

    In this case he sets a stop-loss on $45,000 (10% of $50,000 is 5,000).

    Now, if the price of the asset begins to fall quickly, the trader will lose no more than 10% of the deposit, because in case of a 10% fall, the Bitcoin will be sold immediately. Just like in the case of take profit, it will happen automatically, even if the user does not have access to the trading platform at that moment.

    Thus, the purpose of using a stop loss is to set a specific price point at which the asset will be sold if its value falls, in order to minimize possible losses and not to lose too much.

    When a Stop Loss is used

    Traders use this tool in two basic scenarios:

    1. When in the process of trading it is necessary to distract from the computer to do other things. In this case the trader will not be able to control what is happening on the market for some time. And in order to minimize possible losses he/she can set a stop-loss.
    2. If the market or asset is highly volatile. Even if the trader has the situation under control and is ready to close the deal manually at any time, he still may not have time. The price can at any time jump down and continue to fall. And expecting to close a losing trade manually, the trader runs the risk of losing more than allowed. Using a stop loss solves this problem.

    Using take profit and stop loss at the same time

    Modern trading platforms allow you to use the two mentioned tools in parallel. It allows you to trade without devoting all your time to it and without having to spend hours on the chart every day.

    A trader can open a position and calculate the target profit and maximum allowed loss before setting take profit and stop loss. This way he can be sure that even if the market situation changes rapidly, he will not miss out on any profits:

    • he will not miss a profit if the price rises to the expected level;

    • he/she will not lose more than possible, if the price moves against the expected direction.

    For better understanding we will consider an example:

    • Open a position. Buy 1 Bitcoin at $60,000.

    • Setting a Take Profit. The desired profit from the deal is 10%. So, we need to set Take Profit at $66,000 (initial price of $60,000 plus 6,000, equal to 10% of the initial price).
    • We establish stop loss. The allowable loss - no more than 5% of the transaction amount. Then it is necessary to establish the stop-loss on a mark of $57 000 (the initial price of 60 000 minus 3 000, making 5 % from the initial price).

    That's it - we can say that further trading will take place in automatic mode. Now:

    •  the profit will automatically be locked in if the price rises to $66,000;

    • the asset will be sold automatically if the price reaches $57,000, and the loss will not exceed the allowable limit.

    Take Profit and Stop Loss, if placed in parallel, will act as a linked pair. As soon as one of these two orders is executed, the second order will be automatically canceled. For example, if the price reaches the point at which the take profit is set, the asset will be sold at a profit. And the stop loss order will be canceled immediately, because it is no longer needed, there is nothing left to sell.

    How to record a profit

    Beginner traders often find it difficult to decide how to capture profits. However, even experienced traders are familiar with this problem. One always wants to earn more, and in case of losses not to fix them, but to wait in case the price grows back.

    But the price of volatile assets is unpredictable. Thus, an unrecorded profit can turn into a loss, and a losing trade can turn even more unprofitable. It is therefore important to have a clear trading strategy. It must be planned in advance, and then - just stick to it, without giving vent to emotions.

    Experienced traders often recommend fixing your losses and profits at a ratio of 1 to 3. For example, set Take Profit level at +30% of the price at which the trade was opened. And stop loss is set at -10% of the opening price. Let's look at an example:

    • We buy Bitcoin at $50,000;
    • Take Profit is set at $65,000;
    • Stop loss is set at $40,000.

    Thus, on a long distance, one profitable trade will block three losing trades. And if, for example, the total amount of losing and profitable trades is equal, the trader will still make profit.

    It is necessary to choose the ratio by experience, taking into consideration individual trading results. For example, if there is 1 loss per 10 profitable trades on average, the loss/profit ratio can be even 5 to 1 and the trader will still make profit.

     

    It is important to understand that even the best strategy can fail and lead to unplanned losses. Therefore, it is recommended to allocate for cryptocurrency trading an amount, the loss of which will not be a big blow to you, and will not affect your quality of life.

    Is it worth trading?

    Only 5% of beginners become successful long-term traders - that is a statistic. It is almost impossible to predict where the market will move in the near future. Therefore, if you are just getting started in the world of cryptocurrencies, it is better not to engage in regular trading, but simply buy the assets you are interested in, with the aim of selling them after a long period of time.

    That way, you will protect yourself from losses, and you will know for sure that sooner or later you will sell the cryptocurrency for much more than you bought it. After all, over the long haul, Bitcoin, for example, always shows growth, which can be easily seen on the chart.

    Where to buy cryptocurrency?

    When planning to buy cryptocurrencies, it is important to find a site where you can do so

    • without too much hassle;
    • fast;
    • safely.

    Broex, a platform that combines a cryptocurrency website and a wallet, meets these requirements 100%. It not only allows you to buy Bitcoin and other assets, but also to store them securely and easily, without withdrawing them to third-party wallets. So, by using Broex, you can be sure that when cryptocurrencies go up, you can sell them quickly and easily.

    Here are just a few of the benefits of Broex platform:

    • Funding from card or e-wallet. Supported many ways of deposit, among which you will find a convenient for you.
    • Instant deposit. You won't have to wait long - you can buy cryptocurrencies immediately after depositing money into your account.
    • Opportunity to buy cryptocurrencies for a small amount. Minimum deposit is only 1500 rubles.
    • Low commissions. When exchanging cryptocurrencies through Broex, you can be sure that the commissions will not "eat up" the entire deposit, because they are from 0.1% of the transaction amount. And in some cases, there are no commissions at all.
    • Russian-speaking technical support. If you have any problems you will be able to ask for help from the experts. The support team works 24 hours a day, so you can ask a question even at night.

    In addition, Broex has a simple and clear interface, which is easily mastered by beginners. And if you feel more comfortable buying cryptocurrencies from your smartphone, you can download the official app of the exchanger, and make transactions through it.

    Another important advantage of Broex is that it is officially licensed in Estonia. It proves that the company has passed the inspections of regulating state authorities. This means that working with Broex is safe and secure.

    JOIN BROEX

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