23. Set up of Stop Loss and Take Profit orders
In today’s lesson, we’ll explain what hedging orders are and how to use them in selected cases. The task of the position stop loss is loss reduction, take profit – profit security. You will learn about the possibilities they give us from today’s material.
Definition of Stop Loss and Take Profit
Both orders are designed to secure our trades in the market. Stop Loss is an order to close a transaction when its rate falls/increases below or above a predetermined level. We set it to increase the amount of cryptocurrencies we have, and thus – to maximize our profit. At the same time – minimize losses.
Remember that the protection of your cryptocurrency of capital should be the most important assumption of the strategy. Stop Loss we set it at such a level that the price has room for a correction and any room for movement. It cannot be located further than the maximum allowable and acceptable loss for you. We define it first, before we decide on the size of the transaction. Example:
We buy 5 tokens, the rate of which is USD 5,000/token. At the same time, we set a Stop Loss of $4,000. If the price of the token starts to fall sharply, then the exchange will automatically close our position at USD 4,000. As a result, we will protect as much as 90% of our capital against a price drop.
Take Profit, we include the so-called pending orders. It can be used for both long and short positions. It works automatically, so you don’t have to spend time constantly tracking the quotes and prices of your positions. Thanks to this order, we can predetermine the level of realization of our profits.
What does it mean? And the fact that we can determine the level of our profits, equally with purchase transactions, when we earn on increases, and with sell transactions, when we earn on declines. Example:
We want to sell Dogecoin for the price of $2. We set Take Profit at this level because we would like to take profit from our trade at this level. When the memecoin reaches the price we specify, Take Profit will close our position with a profit.
Why is it worth using Stop Loss?
As a good investor, you should analyse first risk. Then focus on profit. This approach will give you a better chance of success in the long term.
Level determination Stop Loss allows us to accurately calculate the size of the position and the amount we can lose during transactions. What’s more, this order limits our emotions during the decision-making process. This is a particularly important aspect, especially for novice investors. It saves our time and reduces unwanted, even gambling impulses, inconsistent with our assumptions strategy.
Why is it worth using Take Profit?
This assignment has many similar advantages to Stop Loss. How we use them depends mainly on our investment strategy. Thanks to Take Profit we have much more control over the course of our investments. Importantly, it prevents acting with strong emotions.
How to use the Stop Loss instrument
In Order Stop Loss, it cannot be placed on a random level. It is worth knowing where and why it should be located. Here are a few ways to help you place your Stop Loss.
- Trend lines – surely you know the saying “The trend is your friend”. Trend lines are a great tool to help you place your Stop Loss. A trend breakout is a signal for us to end or weaken the trend. In this case, it is worth setting the SL on the other side of the line. Then we will exit the trade when the price gives us a clear signal to do so.
- A candle Pin Bar – they most often appear at critical levels of support or resistance. They are very reliable, so it is worth placing an SL above or below the wick of this candle.
- Inside Bar – the appearance of this candle on the chart is a signal for investors about the continuation of the trend or its reversal. When you spot it, we set the stop loss order outside the parent candle.
- Moving averages – we could devote a separate lesson to them. In short, if the price of an asset is trending, it is moving away from the moving average. When the trend changes, the price returns towards the average. Then we set Stop Loss beyond MA 50 or 100.
- Consolidation– when you notice consolidation zones on the chart, you have two options to set up a defence order. The first – on the border of the consolidation zone, the second – behind the high or low of the candle that is there, depending on which candle we are talking about.
- Fibonacci levels – a good way to identify support and resistance levels. However, this is a more advanced topic that we will look at in detail later. Using this concept, we rely on retracement levels as a place to place a defensive order.
- Bollinger Bands – We set the Stop Loss above or below the middle band and move the order along with the trend.
- Setting Stop Loss based on price. This is probably the most popular tactic among investors.
How to use the Take Profit instrument
Just like with Stop Loss, the order can’t be placed on a random level. More advanced traders even perform technical analysis before locating it. You can also use some simple methods:
- Speaking of sales, we set the TP order myself above our support line.
- If we buy, we set to take profit below the resistance line.
- Most often, this order is placed at a significant level of support and resistance.
- Considering the market spread.
Advantages of Stop Loss and Take Profit
Firstly, thanks to these two orders, we do not have to constantly monitor the market and quotations. We define the target levels of our trades in advance, which allows us to fully automate. With a little willingness and acquired knowledge, determining these two levels is trivial, even for a layman. What’s more, it’s a great way to control our emotions.
Disadvantages Stop Loss and Take Profit
In case of stop loss, its main disadvantage is that we can sell cryptocurrencies that can bring us profits later. However, when it comes to take profit, the final price of realizing our profits may slightly differ from the one we will introduce on the platform.
How to set Stop Loss and Take Profit on the platform?
To set a Stop Loss/Take Profit before opening a trade, go to the order window and enter the level you are interested in. If you want to place orders in an open trade, click on it and select the “Modify or delete” option.
For you, as a trader, the most important goal is protection of your capital. Don’t take risks if the potential gain isn’t worth it. Before you enter a trade, do a thorough market analysis.
Take advantage of the above-described orders that are for your protection. Every trade requires analysis, strategy, and evaluation – before you go into it. Do not rush and do not take advantage of “opportunities”, which can result in much greater losses.For those who feel unsatisfied with orders on the cryptocurrency market, we refer to our supplementary lesson.