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Sweet Spot Trading Suggestions: To Take Profits Or Stop Losses?

The “loss aversion” theory in economics states that people prefer avoiding losses to experiencing equivalent gains. The concept of loss is intolerable to many — as psychology professor Yakos once said: “90% of the misfortune in life is because of unwillingness, which is the reason why many people do not know how to stop losses in time.” ”

A common adage in the trading market goes: “Those who know how to buy are apprentices, while those who know how to sell are masters.” Indeed, when to sell assets is a conundrum faced by many. It is hardly uncommon for traders to be left with a sense of dissatisfaction after feeling they have sold off an asset too early and not maximized profit.

Let’s first look at the stop loss, which refers to how much money we are prepared to lose. Before making an investment decision, many experienced traders will consider the following:

  • Enter a position with a stop loss order
  • $XX is a suitable stop loss point
  • This might be good time to consider stopping losses for this asset

While most are aware of the importance associated with stopping losses, the greater question should center around how to set an appropriate stop point.

Setting a point too close to the position at which you entered will lead to profit erosion should the price eventually trend in your initial predicted direction; conversely, setting a point that’s too far from your position could lead to a wide loss. Therein lies the dilemma: how does one determine a suitable stop loss point?

Let’s take a look at the example below:

Tom can make about $1000 a week, while Sarah can make about $10,000 a week.

Tom sets his stop loss position at $1,000, which is reasonable, because it will only take one week to recover the amount that has been lost. Meanwhile, Sarah sets her stop loss position at $10,000 which is also reasonable, because it will also only take one week to recover her losses.

However, if Tom’s stop loss point is set at $10,000, this becomes problematic, because it will take too long for him to recover his losses. Similarly, it would be irrational for Sarah’s stop loss point to be set at $1,000, because she would stand to lose the opportunity to profit from larger gains.

Therefore, the stop loss is not so much about an actual price point but your ability to manage funds and risks. The best stop loss point would be where the loss amount is close to your control of available funds.

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While it’s simple enough to understand the importance of stopping losses, one might question why a stop profit order needs to be set. Is it not always prudent to maximize profits?

Such questions might not be applicable to holders of stable assets whose prices rise at a steady manner over time. However, digital asset traders usually undertake higher risks in pursuit of greater returns.

And having a higher risk appetite calls for a mindset change.

For example, an asset a trader has held for nearly a year has risen in price and now lays claim to a 20% profit on paper, and he’s debating whether or not to sell it to claim a tangible profit. The next day, the asset’s price falls by 5%; the trader holds on to the asset, hoping the price will bounce back in the next two days. However, the reverse happens and profit has now been shaved to a mere 10% instead of the initial 20%. At this point, the trader would be filled with reluctance at the idea of selling at a decreased profit.

Such a situation is hardly uncommon and is a major reason why a stop profit point should be set in advance. A high stop profit point would ordinarily ensure profits would be little affected by market fluctuations.

We have now grasped the basics behind stopping profits and losses. Let us now look at how a stop limit order can be placed at a cryptocurrency exchange.

🔹The parameters that need to be set for a stop limit order are as follows:

Type: Buy or sell

Stop price: When the market price reaches the “stop price” set by the user, the stop-limit order will be triggered

Limit price: After the stop-limit order has been triggered, the order will be placed with the limit price

Order amount: The amount to be placed after the stop-limit order r is triggered

🔹Example

Assuming we’re placing a stop-limit order to stop loss. You have purchased 10 BTC at 40,000 USDT each, and predict that a price of around 38,000 USDT is a support level. You intend to sell if the price falls below this support level, so a stop loss order needs to be placed. The parameters below are what needs to be set:

Type: Sell

Stop: 38,000USDT

Limit: 37,200USDT

Amount: 10 BTC

In this case, your stop limit order will be triggered at the price of 38,000 USDT and a limit order will be placed with the limit price at 37,200 USDT.

Setting appropriate stop limits, with discipline enforced, will help ensure traders do not suffer losses beyond their means.

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