Take profit and stop loss (TP/SL) are trading tactics that are meant to allow you to lock in gains or minimize losses as an asset's price changes. TP/SL are frequently used by traders of all experience levels to manage risk. If you're a beginner to cryptocurrency trading, it's worthwhile to understand how to use TP/SL as a fundamental stepping stone towards more complex risk management tools. We're here to help.
In this article, we'll walk you through what take profit and stop loss are and how to apply each effectively.
The different types of TP/SL order
Before we get into each order, it's helpful to first understand that two types of TP/SL order exist — a conditional order and a one-cancels-the-other (OCO) order. With a conditional order, the order is only executed when specific conditions in the market are met. With an OCO, two conditional orders are placed simultaneously, and if one is executed, the other is cancelled automatically.
Conditional and one-cancels-the-other are two types of TP/SL
When placing a TP/SL order, you may also see the option to choose a market order or limit order. This feature allows you to define precisely when an order is executed. With a market order, your position will be opened immediately at the current market price. With a limit order, the order will only be executed when the market is trading at a specific price.
When setting TP/SL, you can choose a market order or a limit order
What is a take profit order?
A TP or take profit order is an order to automatically close a position if the price on an asset rises to reach a specific level, with the intention of locking in a gain. Take profit orders are used by traders to capitalize on a rise in market prices and capture gains before the market potentially reverses and prices fall.
The benefit of using a take profit order, in theory, is that you can automatically realize gains on a position without having to spend time watching charts and waiting for prices to reach the desired level. Of course, there's no guarantee prices will rise. If the asset's value doesn't rise to your take profit point, the order won't be executed.
How to choose your take profit point
The take profit point is the price at which your position will automatically close in profit should prices rise to this level.
Many traders consider a number of factors when deciding the take profit point, including technical analysis, news, and their risk tolerance. For example, you could consider applying technical analysis to forecast where a resistance level will be, and use this level as a take profit point to lock in gains before prices potentially begin to fall or track sideways.
Meanwhile, if prices are rising steadily but there's a newsworthy event on the horizon that could cause a fall in prices, you could place a take profit point close to the current market price. This can potentially allow you to capture the ongoing upward trend in the short term and close the position before the expected volatility arrives.
Ultimately, it's important to do your own research and devise a carefully considered trading strategy that factors in take profit points before you start trading. It's also wise to trust your strategy and follow it diligently. Placing a take profit point allows you to do so by helping avoid the emotional impulse to close a position prematurely.
What is a stop loss order?
A stop loss order is essentially the reverse of a take profit order, as it automatically closes a position when prices fall to reach a defined level. This risk management tool can allow you to limit your losses when prices move against you.
Although a stop loss order is often used to minimize losses when a trader opens a long position with the expectation of prices rising, it can also be used with a short position. Here, the stop loss would be set above the current market price, because the trader expects prices to fall.
How to choose your stop loss price
Like a take profit point, deciding the price of a stop loss depends on many factors including your risk tolerance, market volatility, and your trading strategy. Here, it's wise to apply technical analysis to identify potential support and resistance levels, and to predict retracements and reversals that could bring about a fall in prices.
By studying a combination of trading indicators such as relative strength index, moving average convergence divergence, and Fibonacci retracement, you can begin to predict when a period of volatility might occur and set your stop loss to minimize potential losses.
Key considerations when setting a TP/SL
If the market price doesn't reach the trigger price, the order won't be placed.
If the order is executed, the existing position will be closed or a new position will be opened according to the TP/SL set by the user. If the order fails to be executed, your position will still exist.
If the order condition is triggered and the order is placed, and the order price you've set triggers the limit price, the platform will place the order using either the highest or the lowest limit price available at that time. For more details, see our price limit rules.
Which scenarios will lead to unsuccessful TP/SL triggers?
It's not guaranteed that a TP/SL will always be triggered. It's important to understand when this situation might occur so you can adjust your trading tactics and prevent any unexpected losses or missed opportunities for higher gains. A TP/SL may not be triggered in the following situations:
When the amount of your TP/SL position exceeds your maximum amount limit, the order will fail.
When the market fluctuates violently, the TP/SL order may not be executed immediately. This is because the TP/SL order uses the market price to place the order after triggering. If you want to close all positions quickly, you can select a specific position and click 'Close all'.
If there are orders in the opposite direction (excluding reduce-only orders) in your order list, these orders might open a new position after the TP/SL order is triggered. At this time, margin verification may fail, resulting in the failure of the TP/SL order.
The final word
Take profit and stop loss are fundamental tools for traders of all experience levels to understand and apply as part of effective risk management. As each order type will automatically be executed when the defined conditions are met or the set price is reached, they bring a valuable element of autonomy into your trading, helping you trade with more precision and certainty.
Like all aspects of trading, it's important to take your time and conduct thorough technical analysis when setting up a take profit or stop loss, making sure your decision is based on data and evidence, not a hunch. And, it's always recommended to only ever trade with the amount of money you're willing to lose.
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