How Take-Profit and Stop-Loss Orders Can Help Traders Manage Risk Better
No one can ever know, with 100% certainty, when a market will turn against a position or how fast. While it is possible to have a high degree of certainty, by using practical technical analysis tools, that a market is going to move in a given direction, nothing is absolutely guaranteed in trading.
Trading the highly volatile crypto futures requires stop-loss orders when trades are made. Also, it often becomes difficult for most traders to exit a losing trade, hoping it will recover and turn out a winner instead. More often than not, sadly, the loss gets worse, and the account takes a bigger hit. Many times, this ends up wiping out the account.
It is essential to utilize stop-loss and take-profit orders to implement proper money and risk-management strategies. This article will explore how users’ take-profit and stop-loss orders can help traders manage various risks.
What is Stop Loss (SL) and Take Profit (TP)
Simply put, a stop loss order is an open order initiated after you have an active order working in the market that tells your exchange platform to exit the trade at a predefined level to limit a loss on a trade that has gone against your position.
For example, say you long the BTC/USDT at $25,000, and you determine you will exit the trade if it moves against you by $1000. You would simply put in order to exit at $24,000, and if the market retraces to that point, it closes the trade.
Conversely, a take-profit order is the specific price level at which a trader decides to exit a position and realize their profit from the trade. This point is typically reached when the potential for further gains is outweighed by the risks involved. For instance, if ETH/USDT contract has experienced a significant upward move and is nearing a crucial resistance level, traders may opt to sell before consolidation occurs to secure their profits.
So how do you determine your stop loss and profit-taking criteria?
How to Place Stop-Loss Order
The 1% rule is a widely accepted strategy for limiting trading losses. It states that you should never risk more than 1% of your total trading capital on a single trade. For example, if you have $5,000 in your trading account, you should not lose more than $50 on any given trade.
The 1% rule can be used in conjunction with the entry price and stop loss level to determine the appropriate position size for a trade. For instance, if your trade stop loss is set at 5% below entry, the position size should be $50 x 20 = $1000. This means that if the stop loss is hit, the loss will amount to $50, which is 1% of the total trading account.
How to Place Take-Profit Order
Several methods can be applied, such as a set percentage or profit gain.
For example, while trading the ETH/USDT contracts at $100, you may set a profit-taking level at $150. If you bought at $100, then you would exit at $150, regardless of how strong the bullish trend might be.
If the market moves to $200, then you will miss out on the additional $50. Even so, you would have made a $50 profit while you could. Many traders would have stayed in the market until it reached $200 only to see it drop back down to $30 for a $70 loss or wherever their stop limit was set. No matter how far the market moves in your favor, it means nothing unless you are able to actually take the profit.
Using channels
Channels are a valuable tool in technical analysis, providing traders with a visual representation of an asset’s trend. Creating a channel can be as simple as drawing a trend-line off of the lows of a bullish trend that have the greatest clearance and encompass all the price bars.
The next step is to duplicate this trend line and place it on the high that extends furthest out and clears all other highs within the trend. When a price bar reaches this upper line, it signals a potential exit point for taking profits. Whilst the upper line is simply a duplicate of the lower line’s angle, it is remarkable how often the price will react by declining immediately following its contact with this level.
By using channels, traders can identify potential buying and selling opportunities, manage risk and make informed trading decisions. It is important to note that channels are just one tool in a trader’s arsenal and should be used in conjunction with other technical indicators for a well-rounded analysis.
Overall, On the LBank App, it’s pretty simple and straightforward to set up take-profit and stop-loss orders while entering a position. All you need to do is go to the futures page, check the TP/SL, and input the targets. LBank also allows you to set precise points and have full control over the execution price.
Benefits of Take-Profit and Stop-Loss Orders
Using take-profit and stop-loss orders are a smart way to minimize risks when trading. With a take-profit order, you can secure your gains by selling your position at a predetermined price that you had anticipated would be reached. On the flip side, stop-loss orders help you reduce potential losses by automatically selling your position if the market moves against you, protecting your trading account like a free insurance policy.
By placing these orders, you can also free up your time and engage in other activities without constantly monitoring the markets. The orders will be automatically executed when the market reaches the price you set, allowing you to focus on other things while still ensuring that your positions are being managed effectively.
Wrapping Up
The Stop Loss (SL) and Take Profit (TP) functions serve as essential risk management tools in trading crypto futures. There are three options available for exiting a trade: Stop Loss, Market Stop, and Trailing Stop. Out of the two, Stop Loss carries greater significance compared to Take Profit.
While it is possible to alter your orders once you’ve entered a trade, it is advisable to avoid modifying your Stop Loss order once it has been set. Traders may be influenced by the potential profit of an open position, leading them to make irrational decisions. On the other hand, TP orders are should be frequently revised based on the given situation.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
