A good trading strategy is often not enough to bring consistent profits from cryptocurrency trading. Profitable traders usually analyze and set up specific market orders and methods to achieve their ultimate financial goals. PointPay offers a variety of order types to assist users with their trading and hedging strategies. By using stop-loss and take-profit orders, traders can reduce losses and secure profits.
Stop-Loss is a price limitation the trader enters when trading an asset. The open position will close automatically when the specific price limit is reached to prevent further losses. Meanwhile, Take-Profit closes a trading position once a profit target is reached to lock in profits. TP is executed as a limit order, while SL as a market order.
Let’s dig in more and understand the situations where TP and SL can be used at their best!
What are stop-loss and take-profit levels?
Stop-loss is the price you will exit a trade if it goes against you, while take-profit is the price at which you will exit a trade if it goes in your favor. SL and TP levels are the predetermined price of an asset set by the trader. Basically, all you do as a trader is to let the system know how and when you buy an asset and at what price you want it.
For instance, if you want to sell a digital asset and set a Stop-Loss level of 100$, the position will automatically close if the asset drops to 100$. This will ensure that you will not lose money if it keeps dropping.
On the other hand, if you want to buy an asset at $125, you set a Take-Profit level of $125, and the asset will be bought when it reaches your entered price limit. What happens if the price goes up more than $125? Well, you will still get the amount of money you had predetermined for the asset, not more.
Take-Profit is generally common among short-term traders that usually monitor the market daily or even hourly price moves. Meanwhile, the main trick of Stop-Loss is that you no longer need to micro-manage your portfolio.
What are the advantages of Stop-Loss and Take-Profit?
SL and TP protection orders and market and limit orders are risk-management tools that help you protect yourself against losses. As a beginner, the risks of trading on open positions are very high. Let’s explore the benefits of using SL and TP in your trading strategy:
- Reduces Losses
Stop-loss prevents you from losing too much of your investment in one trade; - Maximizes Profits
Take-profit helps you to lock in what you’ve already earned, ensuring you get the amount you intended from the beginning; - Manages Risks
Both are intended to reduce risks and losses; - Provides Automation
Both can be used to avoid the headache of keeping up with the market changes all the time; - Helps maintain discipline
It’s crucial to detach ourselves from market emotions. SL and TP can help you stick to your strategy and promote disciplined trading.
There are certain trading scenarios when TP and SL can be used at their best. Price fluctuation is the main factor you must consider when setting your SL and TP. You can determine how volatile a crypto market is and place the SL at a point the market is unlikely to reach or perhaps the opposite when setting up a trading strategy during an uptrend!
When to “Stop Loss” and “Take Profit” in Crypto
Many beginner traders need help deciding when to use TP in trading. While knowing precisely when to enter and exit a trade largely comes down to understanding price charts and technical analysis, there are a few general signals to watch for.
- Signs of Bearish Chart Patterns
One of the scariest periods for all traders is when the market sends bearish signals. Nonetheless, you should be ready for it by setting your Stop-Loss and Take-Profit levels under an uncertain wave of market development. - Change in Fundamentals
Another good time for TP in crypto is when a fundamental change begins. Unlike technical analysis, which relies on crypto price charts, patterns and indicators, fundamental analysis involves looking at the number of people buying and using crypto. It will show when to enter a trade and take crypto profits. - Uncertain Macroeconomic Conditions
When major market disruptions occur—for instance, a war or a pandemic—it's better to set reasonable limitations in order not to lose big.
How to calculate stop-loss and take-profit levels
Here are some approaches you can use to set and calculate your SL and TP levels.
- The percentage method
This approach is perhaps the most popular due to its simplicity. All you have to do is to determine the percentage of the asset’s price you are willing to give up or take before you exit your trade.
For instance, if you decide you are comfortable with the asset losing 10 percent of its price before you get out, and it is trading at $50, you would set your stop-loss at $45—$5 below the current market price of the asset ($50 x 10% = $5). You would set your level at 10% above the market price for the take-profit scenario. - The support method
This method can be a bit more challenging for novice traders. Support and resistance levels are areas on a price chart that are more likely to experience increased trading activity.
For instance, if you own a digital asset currently trading at $50 and identify $44 as the most recent support level, you should set your stop-loss just below $44. Why not at exactly $44? The reason is that you want to give the asset a little wiggle room before deciding to exit your trade. - The moving average method
To use this method, you need to apply a moving average to your stock chart. The moving average is a technical indicator that filters market noise and clarifies price action data presenting the direction of a trend. Once you have inserted the moving average, all you have to do is set your SL just below and TP just above the moving average level.
For instance, if the asset's current price is $50 and the moving average is at $46, you should set your stop-loss just below $46 and your take-profit above $46 to give the asset a little room to breathe.
Now it’s your turn!
PointPay Exchange strives to provide you with the best solutions to make smarter trading decisions. Enjoy setting up profitable trading strategies with stop-loss and take-profit without taking too much risk.Don’t forget to consider overall market conditions before using the order types by analyzing the price chart and technical indicators available on our marketplace. Grow your investments on a secure and innovative platform!
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