Effective trading in the cryptocurrency market requires a solid plan and the discipline to stick to it. Experienced traders consistently emphasize the importance of managing emotions while trading. Integrating take profit and stop loss orders into your strategy is a powerful way to reduce emotional decision-making.
A structured trading plan is essential for defining your risk management approach. Many tools are available to help you create a detailed plan tailored to your needs. The primary goal of any plan should be to minimize losses and maximize gains. Take profit and stop loss orders play a crucial role in achieving this.
What Is a Take Profit (TP) Order?
In cryptocurrency communities, you'll often encounter the term take profit, abbreviated as TP. A take profit order automatically closes your position when the asset reaches a specified price. This allows you to avoid constantly monitoring price movements to manually close a trade.
It's important to remember that for a long position, the TP order must be set above the current market price. For a short position, the opposite is true—the TP should be below the current market price.
Determining when to partially or fully exit a position before entering the trade is a wise practice. This approach lets the market move freely without you worrying about the optimal exit point, helping to prevent emotions from influencing your decisions.
What Is a Stop Loss (SL) Order?
Even the most skilled traders experience losing trades. Any honest trader will admit that losses are part of the game. The key to long-term profitability lies in effective risk management—ensuring that losses are kept as small as possible. This is achieved by using a stop loss order for every trade.
Similar to a take profit order, a stop loss order automatically closes your position once a predetermined price is reached. However, it serves the opposite function. For a long position, the stop loss is set below the current market price. For a short position, it should be placed above the current market price.
Just like with a TP, it's advisable to set your stop loss before opening a position. This pre-planning helps maintain discipline and protects your capital from significant downturns.
Stop Loss vs. Stop Limit Order
Two order types that often cause confusion are the stop loss and the stop limit order. Both can be useful in different scenarios, so let's clarify how they work.
When a stop loss order is triggered, your position is immediately sold at the current market price. In fast-moving markets, this could mean selling at a price lower than your set stop loss level.
A stop limit order operates differently. Here, you set a trigger price and a minimum sell price. Once the trigger price is hit, a sell order is placed at your specified minimum price. This ensures you never sell below your set minimum, though it may not execute if the price doesn't rebound.
Example: Stop Loss vs. Stop Limit
Imagine you buy Coin X at €50 and set a stop loss at €49 to limit potential losses. If the price drops to €49.10 and then plunges to €48.50, a stop loss order would sell your position at €48.50 if there are no buyers between €49 and €48.50.
With a stop limit order, you could set the trigger at €49 and the minimum sell price at €48.90. If the price falls to €48.50, the order is triggered, and a sell order is placed at €48.90. Your coins will only be sold if the price rebounds to at least €48.90. If the price stabilizes at €48.95, you’ll sell at that price.
This shows that a stop loss order is safer during sudden crashes, though you might receive less than expected. The same principles apply to short positions, with all prices inverted.
What Is a Trailing Stop Order?
Besides standard and limit stops, there's a third variant: the trailing stop order. Although not available on all exchanges, it can be very useful.
A trailing stop moves with the market price as it trends in your favor. For a long position, the stop loss rises with increasing prices. For a short position, it decreases as the price falls.
This order type is designed to lock in profits during extended trends. If the price reverses, the stop loss is triggered, securing your gains.
In a general uptrend with occasional minor dips, avoid setting the trailing stop too close to the market price to prevent being stopped out prematurely. Missing a subsequent rally would be unfortunate.
Example: Trailing Stop Order
Suppose you enter a trade when a coin is priced at €50. You set a trailing stop order €2 below your entry price, so it starts at €48.
If the price drops to €49, nothing happens—your stop remains at €48. If the price then rises to €55, your stop loss adjusts upward to €53. If the price later falls below €53, your position closes at €53.
If the price dips to €53.10 before rising again to €58, your stop loss would continue trailing upward, now set at €56. This allows you to capture more profit if the price peaks at €58 before retracing to €50.
How to Calculate Take Profit and Stop Loss Levels
There are no fixed rules for setting take profit and stop loss levels. They largely depend on the price history visible on the chart. Identify key support and resistance levels, and place your orders just above or below them.
For longer-term trades, these percentages are often higher than for shorter ones. A common recommendation is to use a risk-reward (RR) ratio of 1:2 or higher. This means you can lose 50% of your trades and still be profitable. Let’s illustrate with an example.
Assume you place 10 trades of €100 each with an RR ratio of 1:2. Losing 5 trades would cost you 5 × €1 = €5. Winning 5 trades would gain you 5 × €2 = €10. Your net profit is €10 - €5 = €5. Higher RR ratios generally lead to greater overall profits, while ratios below 1:2 are often discouraged.
Using Multiple Take Profit Orders
Consider setting multiple take profit orders instead of just one. The price might hit your first TP and then reverse downward, or it might continue rising, in which case you’d want to capture additional gains.
A strategy I frequently use is setting three TP orders, each for 25% of the position. I let the final 25% run to see where the price goes. After TP1 is hit, you might raise your stop loss to your entry price. After TP2, move the stop loss to the TP1 level, and so on. This way, you ensure no loss on the remaining position after TP1 is triggered.
👉 Discover advanced order strategies
Setting Take Profit and Stop Loss on Exchanges
Different exchanges offer varying functionalities for order types. Below, we compare two popular platforms.
Using Bitvavo
Unfortunately, Bitvavo does not support standard stop loss orders. However, you can set stop limit orders. There is also no dedicated take profit order type, so you must use limit sell orders instead. Additionally, short positions are not supported on Bitvavo.
Step 1: Access the Advanced Dashboard
To place these orders, use Bitvavo’s advanced dashboard. After logging in, click ‘Advanced’ in the top-right corner. Note that this dashboard is only available in English.
Step 2: Place a Buy Order
If you already own the coins you wish to sell, skip this step. Otherwise, use a limit buy order to set a specific purchase price or a market order to buy at the current price.
Step 3: Confirm Your Buy Order
Review and confirm your order details before proceeding.
Step 4: Set a Take Profit Order
Since there’s no dedicated TP function, use a limit sell order. You can set multiple orders (e.g., 25% each) as described earlier.
Step 5: Set a Stop Limit Order
Use the stop limit order type to simulate a stop loss. Set a trigger price and a minimum sell price to protect your position.
Step 6: Wait for Execution
Once all orders are set, avoid constantly checking the market. Let the orders execute automatically.
Using FTX
FTX simplifies the process by allowing you to set buy, take profit, and stop loss orders simultaneously in a single interface.
Step 1: Choose Your Trading Pair
Select your desired trading pair (e.g., BTC/EUR). FTX offers numerous pairs for each cryptocurrency.
Step 2: Place Your Orders
In the advanced options, choose between long (Buy) or short (Sell) positions. Enter your entry price, take profit, and stop loss levels. The interface displays potential profit/loss and the RR ratio in real-time.
Step 3: Confirm Your Orders
Double-check all parameters before confirming to avoid errors.
Step 4: Monitor Your Orders
Track your open orders and positions in the respective dashboard sections. Remember to cancel any unused orders to avoid confusion.
Step 5: Wait Patiently
Allow the market to move without micromanaging your trades. Check periodically for updates.
👉 Explore efficient trading platforms
Frequently Asked Questions
What is the main purpose of a stop loss order?
A stop loss order automatically exits a trade at a predetermined price to limit potential losses. It helps enforce discipline and protects your capital from significant downturns.
How does a take profit order work?
A take profit order closes your position when the asset reaches a specified profit target. This locks in gains without requiring constant market monitoring.
Can I use both stop loss and take profit orders simultaneously?
Yes, most advanced trading platforms allow you to set both orders at the same time. This combination helps manage risk and secure profits automatically.
What is a risk-reward ratio, and why is it important?
The risk-reward ratio compares potential profit to potential loss in a trade. A ratio of 1:2 or higher is recommended because it allows profitability even if only half of your trades are successful.
Are trailing stop orders available on all exchanges?
No, trailing stops are not universally supported. Check your exchange’s order types to see if this advanced option is available.
How do I choose appropriate take profit and stop loss levels?
Analyze historical support and resistance levels on price charts. Place orders just beyond these key points to avoid premature triggers while capturing meaningful moves.
Conclusion
Mastering take profit and stop loss orders is essential for successful cryptocurrency trading. These tools help automate your strategy, reduce emotional interference, and improve overall risk management. Whether you use a simple stop loss or advanced trailing stops, incorporating these orders into your plan will enhance your trading discipline and potential profitability. Always adapt your approach based on market conditions and your individual risk tolerance.