Understanding Stop-Loss and Take-Profit Levels
While Price actions and evaluating market movements are essential in crypto trading, minimizing potential losses by using stop loss and take profits levels are very important.
Why use stop loss and take profit levels? Well, take boxing, for example — how many times do boxers get hit? Relatively several times. But how often do they wear helmets? Every match. That’s because if you got hit with a punch, the result would likely be fatal.
Exactly the same principles apply to crypto trading — if the markets go against you and you have no stop loss (the trading equivalent of a helmet), you might lose trades.
This article will explain the concept of Stop Loss and Take Profit and how you can calculate and apply them to your crypto trading.
What is a Stop-loss level?
Stop loss is a trading tool that allows traders to predetermine the price level at which the position will be automatically closed in case of erratic market movements. The main objective of setting a stop loss level is to put a limit on the potential loss a trader can incur.
For example, say you want to buy bitcoin and set a Stop Loss of $19000. The position will automatically close if the asset rises to $19000$. This will ensure that you do not lose money if the price keeps rising.
Stop loss is essential when trading crypto, given the high volatility of the markets. Not using stop losses and taking profit level when trading is as good as breeding disasters.
What is a Take-profit level?
A take-profit level is a trading tool that allows setting a predetermined price to exit a trade if it goes in their favor. The main aim of Taking Profit is to automatically exit a trade position without getting swayed by persistent price fluctuations.
For example, if you want to buy bitcoin at $17000, you set a Take-Profit level of $17000, and the buy order will be placed once it reaches your entry price limit. What happens if the price increases? Well, you will still benefit from the set price for bitcoin.
Fortunately, top cryptocurrency exchanges such as LBank allow users to set stop-loss and take-profit orders. For example, users can trade futures and time the market with these tools without monitoring the markets 24/7.
Importance of Stop-loss and Take-profit Levels
The rule of thumb is if you do not manage the risk; eventually, they will carry you out. The point is no matter how much profit you make on each trade, if you expose yourself to unnecessary risk, you may lose at some point. Here are some significant reasons to use Stop-Loss and Take-Profit levels.
stop-loss and take-profit levels are basically integral parts of creating a successful trading strategy. For example, if you form a strategy on the basis of risking $100 and aiming to make $400 profit, you only need to be right one time out of four in order to break even, and if you’re only right two times, you will still benefit from the markets in the long run.
Overall, with risk management strategies, traders get to prioritize more promising trades, preventing their portfolios from being wiped out completely.
Removes Emotions from Trading
Involving emotions while trading is one of the prevalent reasons why traders lose money on their trades. With Stop-Loss and Take-Profits, you are able to remove the emotions from your trading since it’s automatically executed.
How to Evaluate Stop Loss and Take Profits Levels
The crypto market provides different ways to minimize risks. Combining technical indicators such as support and Resistance, moving averages, Average True Range etc., can help traders determine optimal stop-loss and take-profit levels.
Support and Resistance Levels
Support/resistance is one of the key concepts in crypto trading. Support is where the price bounces up as buyers start buying in large numbers hoping for a price increase, while Resistance is where price action bounces back as sellers start selling in large numbers.
Support and Resistance levels are an effective trading tool to time the market. And usually, traders set take-profits above the support level and stop-loss level below the resistance level.
This technical indicator is most commonly used to stop loss and take profit levels as it reflects the direction and trends a market is moving. With moving averages, traders can keep a watch on the market to spot “less-risky” trade opportunities with its crossover signals.
The crypto market is highly volatile. As such, it’s essential to have a strong and solid trading plan. Most times, it can be as simple as setting Stop Loss and Take Profits to limit exposure to losses and maximize profits.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.