Investing is a strategic allocation of funds to preserve and increase them. Among various investment methods, investing in cryptocurrencies remains one of the most sought-after.
However, earning profits on a cryptocurrency exchange is associated with financial risk. To effectively manage risk, investors use special types of orders known as stop-loss and take-profit. These smart orders are considered a key tool for controlling a trader’s position in the market, providing the ability to reduce financial risks during trading systematically.
Setting up these smart orders is relatively simple and quick. To set stop-loss and take-profit on a cryptocurrency exchange or trading platform, log into your account, choose the desired asset, and open a trade. Then, determine the stop-loss levels (to minimize losses) and take-profit levels (to lock in profits) before confirming the order. Let’s look at what smart orders are and how they work.
What is a stop-loss?
A stop-loss is a strategic order set by a trader for the automatic closure of a trade when the price of an asset reaches a certain level. The primary goal of a stop-loss is to minimize losses in the event of unfavorable market movements, protecting the investor from significant downturns. This order helps the trader monitor risks and manage investments, freeing them from the need for constant market monitoring.
These tools have two key characteristics:
- Automatic opening or closing of a position, eliminating the need for manual intervention.
- The actual execution of the trade is not instantaneous but occurs after a certain period.
Thus, operations can be carried out without the trader’s involvement, allowing them to be away from the market at that moment.
How Stop-Loss Works:
When you buy Bitcoin for $50,000, there is a risk that its value may decline. To safeguard your funds, you set a stop-loss at a level, let’s say, $48,000.
- Setting the level: You set the stop-loss at $48,000, determining the maximum loss level you are willing to allow.
- Automatic operation: When the price of Bitcoin reaches or falls below the $48,000 level, the stop-loss is automatically activated.
- Trade closure: The stop-loss automatically sends a sell order for Bitcoin at the current market price.
- Minimizing losses: The sale occurs instantly, minimizing your losses to the $48,000 level.
Thus, the stop-loss serves as a protective mechanism that allows you to automatically exit a position at a pre-determined loss level, preventing further financial losses.
What is Take Profit?
Take Profit (TP) is a strategic order in trading aimed at the automatic closure of a trade when a certain profit level is reached. When a trader sets a take profit, they determine a target price at which the trade automatically closes, locking in the expected profit. Thus, take profit helps traders protect their earnings, preventing the missed opportunity of closing a position profitably in volatile market conditions.
How does Take Profit work?
Take Profit is not just a technical term in the world of cryptocurrency trading; it is a strategic tool that allows traders to automatically lock in profits when a target level is reached. Let’s break down how it works in practice, using Bitcoin and a specific scenario.
Imagine you enter a position in the Bitcoin market, buying it at the current price of $50,000. You anticipate that the asset’s price will rise and need a mechanism to protect and capture future profits.
It is crucial to determine the desired profit. You decide to set the take profit at $55,000 – the price at which you are willing to automatically close your position, securing the profit.
In the following days, the price of Bitcoin rises and eventually reaches $55,000.
When the market price reaches or exceeds the $55,000 level, your take profit is automatically activated.
Now, according to your strategy, you automatically close your position at the current market price. The difference between the opening price and the take profit is your fixed profit.
Thus, take profit acts as an automated mechanism that helps you lock in profits in volatile market conditions, guarding against potential trend changes and providing more effective management of your investment portfolio.
Similarities and Differences between Stop Loss and Take Profit
| Characteristic | Stop Loss | Take Profit |
| Purpose | Minimize losses in case of adverse asset price movement. | Lock in profits when a specific price level is reached. |
| Setting Level | Set below the current price to protect against losses. | Set above the current price for a fixed profit. |
| Activation | Activated when the stop-loss level is reached or exceeded. | Activated when the take-profit level is reached or exceeded. |
| Action | Automatically closes the trade to minimize losses. | Automatically closes the trade to lock in profits. |
| Relationship with Risk | Linked to risk management and preventing significant losses. | Associated with protecting profits and avoiding missing the opportunity to close a profitable trade. |
These tools, although performing different functions, both aim at risk management and can be key elements in a trading strategy.
The ratio of Stop Loss and Take Profit
The ratio of stop loss to take profit in trading is determined by a crucial aspect – risk and reward management. These two parameters are often considered together and form the basis for effective investment management. The recommended ratio between stop loss and take profit is often expressed as the Risk-Reward Ratio.
Risk-Reward Ratio:
Stop Loss: This parameter determines the level of maximum losses a trader is willing to allow in the event of an unfavorable market movement. For example, if a trader sets a stop loss at 2% of their capital, it means that the maximum losses in the trade will not exceed 2%.
Take Profit: This parameter defines the profit level that a trader aims to achieve. For instance, if a trader sets a take profit at 4%, it means that they expect to gain a profit of 4% of their capital.
Examples of Risk-Reward Ratios:
Risk-Reward Ratio: 1:3
The trader is willing to risk losing 1% of their capital (stop loss) to gain 3% in profit (take profit).
Risk-Reward Ratio: 1:2
The trader sets a stop loss at 1% and a take profit at 2%. Thus, they are prepared to lose 1% of their capital but expect to gain a 2% profit.
Risk-Reward Ratio: 1:1
The trader is willing to risk 1% of their capital (stop loss) to achieve an equal profit of 1% (take profit).
Risk-Reward Ratio: 2:1
The trader sets a stop loss at 2% and a take profit at 1%. Consequently, they risk a loss of 2% but anticipate a profit of 1%.
Why Ratios are Important:
Most traders aim for a ratio where potential profit exceeds potential losses, as this can ensure effective risk management in trading. The choice of a specific ratio depends on the trader’s strategy, their comfort level with risk, and market conditions.
How to Set Stop Loss and Take Profit on the Cryptorobotics Platform
Cryptorobotics provides a convenient and powerful trading functionality, including the ability to place stop-limit, limit, and market orders along with Stop Loss and Take Profit. This tool will not only help you increase the profitability of your trades but also reduce losses in market downturns.
Steps to Set Smart Orders for Buy/Sell:
- Log in to your account on the Cryptorobotics platform.
- Go to the “Trading” section.
- On the tab with the selected cryptocurrency pair, click the “Smart Order” or “Buy” button.
- When creating a new order, open its advanced settings.
- Specify the price at which you want to purchase the coin.
- Determine the quantity of the coin you want to buy.
- Choose a percentage of the free deposit or specify the balance in the base currency.
- In the advanced settings section, you have the option to activate Stop Loss and Take Profit, specifying the corresponding prices.
- Confirm and complete the creation of the smart order, ensuring the accuracy of the entered data.
Conclusion:
Applying Stop Loss and Take Profit in the cryptocurrency market is a key factor in a trading strategy, providing the ability for effective risk management and profit fixation. These essential tools not only help minimize losses but also ensure traders adhere precisely to their strategy, especially when using pending orders.
This approach allows for a reduction in psychological stress and more confident decision-making in the dynamic environment of cryptocurrency trading. In light of this, every market participant can familiarize themselves with the advantages of these tools and actively incorporate them into their trading strategy for more successful portfolio management.
