Stop Loss And Take Profit

“Stop loss” is a protective order that limits the trader's loss in the event of a stock drop. It automatically closes the deal if the asset price reaches the minimum set level. “Take profit” limits the amount of a profit. The investor independently determines the amount of profit, upon reaching which the shares will be automatically sold.

“Stop loss” and “take profit” are convenient markers that allow a trader to build a strategy and monitor its work. They protect the investor from force majeure, technical failures on exchanges or some mistakes in the market situation (human factor). Both of these orders are pending. They are tied to open trades and are able to close them on their own.

In the world of cryptocurrencies, where assets are unstable, and periods of high and low volatility of tokens are unpredictable, the use of pending orders might be a good idea. With the help of “stop loss” and “take profit” technologies, a transaction can be opened and closed without the direct participation of a crypto trader. It all happens automatically, so traders don't need to constantly monitor their deals. 

How does “stop loss” work?

The main task of this order is to help minimize risks in short-term investments. Since it’s almost impossible to predict increases and failures on the crypto market, “stop loss” can save traders from financial failure. With long-term investments, this approach is unprofitable, since the profit is more or less stable over a long investment period. “Stop loss” is placed as an addition to an open position. Let’s take an example of using this order.

Just imagine that you decided to purchase 1 BTC at a market price of $18,000. In this transaction you're ready to lose, let's say, 10 percent in case the price of this coin falls. So it might be a good idea to place a “stop loss” order at $16,000. From this moment even if BTC price drops dramatically, your deal will be safely sold. Of course, there will be some losses but no more than planned 10%.

How does “take profit” work?

This order is aimed at fixing profits. It is set in the same way as “stop loss” as an addition to an already open position. Its main goal is to set a profit target and lock it in. This tool will automatically sell your asset, when the profit will reach the needed level. 

Once again let’s pretend that you want to buy 1 BTC at the same market price of $18,000 as in the previous example. And you want to receive 20% of profit in this deal and want to receive it in the amount of 20%. Then you can set a “take profit” order at $22,000, and if the price raises, then when it reaches $22,000, your BTC will be automatically sold at the current market price. 

It can sometimes be difficult to keep track of profit indicators on your own, especially with short-term investments, where the level of prices is constantly jumping. If investors do not plan to spend sleepless nights in front of a monitor with charts, then setting orders will save their time and efforts.

Strategies based on “stop loss” and “take profit”

Experienced traders build a strategy of their further actions using these two tools. The most common are the following stop loss/take profit ratios:

1. Stop loss/take profit – 1:3

Best way to use: long time investment.

Required number of successful transactions for stable profit: at least 30%

If you correctly analyze the market and make a correct price forecast, then you can get the maximum profit – one successful take profit will cover the losses from three stop losses.

1. Stop loss/take profit – 1:2

Best way to use: medium-term strategies

Required number of successful transactions for stable profit: at least 40%

There should be a little more successful trades in this option than with the previous ratio, since one take profit will cover losses from only two stop losses.

1. Stop loss/take profit – 1:1

Best way to use: uncertain market 

Required number of successful transactions for stable profit: at least 50%

In this case, take profit is completely covered by stop losses.

1. Stop loss/take profit – 2:1

Best way to use: scalping strategies

Required number of successful transactions for stable profit making: at least 70%

In this option, the amount of “take profit” will exceed the amount of “stop loss”, but the losses will come in double size. This ratio is used by confident traders and is aimed at making a profit regardless of the global market movement.

Using “stop loss” and “take profit” orders allows traders to reduce the level of psychological stress while making deals on the crypto exchange. These tools greatly facilitate the work of the investors and allow them to switch to those things that still require human intervention. So those who plan to stay on the crypto market for a long time and receive a stable income should learn how to use these two orders. However, don’t forget to research these tools by yourself to understand if they really suit you.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.