How to Set Stop-Loss and Take-Profit Orders

Source: Cointelegraph

Original article: (How to set stop-loss and take-profit orders)

Bitcoin (BTC) and cryptocurrency traders can rely on automated orders on trading platforms to limit losses and ensure profits.

Stop-loss orders in Bitcoin trading began with manual risk management in the early 2010s. Today, they have evolved into advanced automated tools on modern exchanges.

In today's environment, where algorithmic trading is becoming popular and robots intervene, the proper use of professional trading tools like stop-loss and take-profit orders will effectively protect the security of your trading.

Building an advanced Bitcoin trading strategy does not guarantee the success of the risk management plan. Regularly monitoring the market helps you understand the current market situation and avoid inaccurate strategic decisions.

Stop-loss and take-profit orders as trading tools have been widely used in traditional financial markets long before Bitcoin emerged as an important means of risk management and profit protection.

These tools help reduce the risk of loss and improve performance by automatically executing buy or sell actions when the asset price reaches a predetermined level.

With the emergence of Bitcoin in 2009 and its listing on major exchanges, these advanced trading strategy tools have become particularly important in responding to significant price volatility of this cryptocurrency.

As the influence of the Bitcoin (BTC) market grows, traders begin to adopt stop-loss and take-profit strategies from the forex and stock markets. In the early days, price tracking relied mainly on manual operations, but automation functions introduced by cryptocurrency platforms subsequently changed the trading model entirely.

Stop-loss and take-profit orders are professional trading strategies that help investors automatically manage risk and lock in profits. Essentially, they are automated instructions that traders set on the platform to automatically close positions when the price reaches a certain level.

These tools effectively limit losses in case of significant price drops or automatically lock in profits when target prices are reached. With the right setup, they can optimize profits and control loss risks. This mechanism helps eliminate emotional interference in the trading process and avoid potential mistakes in decision-making. These tools are especially useful for traders who cannot monitor the market 24/7.

Certain market conditions must be met for the order to be activated. The Bitcoin trading environment is extremely volatile. Prices change rapidly, and system delays can cause execution prices to deviate from expectations or may not even be activated. This type of trading strategy provides important psychological safety for risk-averse investors.

An ideal stop-loss order for traders who want to control risk and protect their capital. For buy trades, you can set the stop-loss level below the entry price, while for sell trades, set the stop-loss above the entry price.

When the market price drops, the system will automatically close the position at the price you set beforehand, effectively preventing further losses.

For example, if you buy Bitcoin at $90,000 and set the stop-loss at $85,000, when the price drops to $85,000, the system will automatically sell your position and control the loss at $5,000.

To ensure profits from your trades, you can use take-profit orders. Simply set a target price higher than the entry price, and when the market reaches that level, the trade will be automatically executed, achieving the desired profit.

Specific example: If you buy Bitcoin at $90,000 and set the profit target at $95,000, when the price reaches $95,000, the system will automatically sell it, locking in a profit of $5,000 for each Bitcoin.

Strong price volatility in the Bitcoin market makes stop-loss and take-profit orders essential risk management tools. These professional trading mechanisms effectively reduce the risk of losses while increasing profit opportunities.

It is important to note that placing these orders does not guarantee that they will be executed as planned. The effective execution of orders depends on many market factors, especially the current trading volume.

Although the price volatility of Bitcoin has decreased over time, the market can still experience significant price swings. Without appropriate risk management mechanisms when trading Bitcoin, traders may face severe financial losses.

Here are some key reasons to incorporate stop-loss orders into your Bitcoin trading strategy.

Bitcoin volatility: BTC can still drop 10% in a very short time due to news, whale movements, or market sentiment. For example, on December 5, 2024, the price of BTC suddenly dropped from $103,853 to $92,251, after which the price recovered. When a rapid crash occurs, stop-loss orders can limit your downside risk. Without a stop-loss order, you would have to take on the risk of guessing when the market will recover.

24/7 market: The Bitcoin market operates 24/7. Setting stop-loss levels can prevent losses from sudden price drops when you are resting.

Emotional factors: The emotional state of traders can significantly influence their trading performance. Emotion-driven investors often buy or sell in a panic, leading to severe losses. Stop-loss mechanisms can help mitigate the risk of making costly wrong decisions before fear takes over.

A well-developed Bitcoin trading strategy typically includes clear price targets and profit ratios. Setting profit-taking orders for BTC is an important component of the overall trading risk management plan and can help achieve the following goals:

Locking in profits: The high volatility of BTC, whether in a bull or bear market, can lead to rapid price increases, but it can also lead to equally rapid reversals. Take-profit orders ensure that you can close profits before the market drops back.

Control greed: Without a take-profit order, traders can easily be tempted to chase higher prices, which is often difficult to achieve in the short term.

24/7 market: Investors cannot track market developments 24/7. Take-profit orders ensure that you will automatically make a profit if the price suddenly increases, even if you cannot monitor the market in real-time.

The method of setting stop-loss and take-profit levels when trading Bitcoin varies by platform. However, this process is generally quite similar across major cryptocurrency exchanges like Binance, Coinbase Pro, and Kraken.

Here is a step-by-step guide on how to set stop-loss and take-profit orders for BTC.

This is perhaps the most important step in implementing an advanced BTC trading strategy. It is crucial to choose a trading platform that fits your personal needs. Be sure to carefully check the fee structure, trading volume, market reputation, and security measures of the platform, as these factors will directly impact the execution of your trading strategy.

After successfully setting up your trading account, log in to the platform and navigate to the trading interface to find the order form.

Choose the appropriate BTC trading pair, such as BTC/USD.

Place buy (long) or sell (short) orders depending on your trading strategy. For example, you might place a buy order for 1 BTC at $90,000.

Below is an example of placing orders on the Kraken platform.

As shown below, click on the Stop Loss option in the Orders menu to enable this feature.

First, assess your risk tolerance and determine the maximum loss you can accept in the event of a sharp decline in Bitcoin prices, from which you can set a reasonable stop-loss level.

For example, if you buy BTC at $92,500, you can set the stop-loss at $87,300, meaning you limit your potential loss to around 5.62%.

Loss amount = 92500 - 87300 = 5200 USD

To calculate the loss ratio, the formula is: (5200 / 92500) * 100 = 5.62%

Operate on the same trading interface.

As mentioned above, after selecting the BTC trading pair and purchasing the appropriate amount of BTC, click on the Take Profit option.

Set your take-profit price according to your exit strategy. For example, you might want to set a price 5% higher than the entry price; if you buy BTC at $90,000, the take-profit price would be $94,500.

Enter the sell price as $94,500. When Bitcoin reaches this price, the system will automatically execute the sell order.

Confirm and activate the order after carefully reviewing the quantity and price, then submit the order.

If you enable notifications, you will receive immediate alerts when your order is activated.

You can check the status of your orders at any time and cancel or modify current orders if market conditions change.

Traders can effectively limit potential losses by setting stop-loss orders. This tool helps protect funds during periods of high market volatility. Considering that Bitcoin's daily volatility can reach 5%-10%, setting stop-loss levels based on the market's volatility is a wise choice.

Reference for volatility: Professional platforms like TradingView provide a 14-day average true range (ATR) indicator. This allows you to set a reasonable stop-loss range below the entry point. For example, you might set a fluctuation range of $3,000. If you buy Bitcoin at $90,000, your stop-loss will automatically activate when the price drops to $87,000.

Cooperate with the support level setup: According to historical data, BTC tends to respect price support zones. Setting the stop-loss a little below a crucial support level can provide more reliable protection. For example, if you buy Bitcoin at $90,000 and $88,000 is a clear support level, you should set the stop-loss at $87,800, slightly below this area to avoid stop-loss hunting mechanisms.

Avoid common price levels: Market participants and algorithmic trading bots often hunt for stop-loss orders at round price levels ($80,000, $85,000) or clear chart patterns, triggering a large number of orders before the price reverses. Setting stop-loss orders at a non-round number, such as $87,800 instead of $88,000, can increase the effectiveness of stop-loss execution.

A trailing stop-loss order is a dynamic order that automatically adjusts the stop-loss price as the market price fluctuates favorably, helping to lock in profits and control risk. This mechanism is designed to maintain a fixed distance below (for long positions) or above (for short positions) the current market price. Compared to traditional stop-loss orders, trailing stop-loss orders can capture market trends and lock in profits better.

In practice, you will set a stop-loss order when the price rises, usually 3%-5% below the peak price. For example, if you buy BTC at $90,000 and the price rises to $95,000, the stop-loss order will automatically adjust to $93,250. Depending on the capabilities of the trading platform, you can set this adjustment mechanism manually or automatically.

Slippage is the difference between the expected price of a trade and the actual execution price, often due to volatile market conditions or insufficient liquidity.

During significant BTC declines, the actual execution price may exceed the stop-loss price you set due to drastically reduced liquidity. For example, a stop-loss order set at $88,000 may actually be executed at $87,500. To address this situation, it is advisable to widen the stop-loss range by an additional 0.5%-1% to improve execution accuracy.

Adjusting stop-loss levels should be done carefully. Reasonable adjustments can effectively protect funds from unexpected market fluctuations and lock in profits at the right time. Professional traders often adjust their stop-loss levels based on support or resistance levels or use trailing stop-loss strategies. You can make these adjustments through the 'Modify Position' or 'Edit Trade' feature on your trading platform.

When the market fluctuates favorably for you, you should consider tightening the stop-loss position. If BTC's price increases significantly after you enter the trade, a trailing stop-loss can reduce risk or lock in existing profits.

For example, when BTC rises from $88,000 to $93,000, you may raise the stop-loss to $90,500 to ensure that you do not lose money on this trade even if the price later drops back. Monitor the stop-loss levels in the trend. When Bitcoin (BTC) continues to rise in a bullish market, the stop-loss order can capture more profits along the way. Investors can adopt a trailing strategy based on percentage or ATR. For example, if you enter the market at $90,000, when BTC rises to $100,000, you can adjust the stop-loss to $97,200, thus locking in a profit of $7,200 for each coin. If there is a subsequent pullback, this will equate to an 8% profit.

Widen the stop-loss range during market consolidation, as tight stop-loss orders can easily be triggered in a volatile market. For example, if BTC enters a consolidation phase after entering the market at $90,000, the stop-loss level can be widened from $88,000 to $87,500 to avoid the risk of sudden price drops below support levels.

Adjust your strategy appropriately before major events are announced, such as the Federal Reserve's interest rate decision or ETF approval. Such events can cause significant volatility and increase the risk of slippage. If you decide to continue holding your position, you can tighten the stop-loss to 1%-2% or loosen it to 10% to catch the upward trend.

Take-profit orders can be flexibly adjusted based on market momentum or resistance levels to maximize profits. Similarly to stop-loss actions, traders can select an open trade on the trading platform and choose the 'Modify Position' or 'Edit Trade' option to make corresponding adjustments.

Expand profit-taking targets when the price rises sharply. This helps avoid exiting the market too early during a bullish trend. If you observe a sudden increase in trading volume or a breakout above a significant resistance level, you may increase the profit-taking position. For example, if you buy at $90,000 and set a profit target at $93,000, if BTC quickly reaches $92,500, you can adjust the profit target to $95,000 or $97,000 to maximize potential profits.

Take profits in stages at significant price levels. Resistance levels such as $85,000 or $90,000 are often areas where BTC may reverse. At this point, you may choose to close a portion of your position to lock in profits while keeping the remaining positions open to continue participating in the market.

Tighten profit-taking settings when approaching resistance levels. BTC often encounters resistance at round numbers or historical highs. If the price approaches a significant resistance area, the profit target can be lowered from $90,000 to $88,500 to lock in profits early.

Reset the profit-taking strategy after a price drop. Don't be discouraged if you miss an opportunity to profit, as BTC will often rebound after a decline. If BTC drops to $85,000 after entering at $90,000, the profit target can be reset at $87,000 or $88,000 to achieve a modest gain.

The Bitcoin market's high volatility requires a robust trading strategy. Stop-loss and take-profit orders are crucial tools, but if not set up correctly, they can do more harm than good. Below are some common mistakes traders make and how to address them:

Stop-loss levels set too tightly: Setting stop-loss levels too close to the entry price means that a mere 2%-3% fluctuation can trigger the exit order. Be sure to account for Bitcoin's high volatility and use volatility indicators and support level analysis sensibly.

Ignoring slippage risk: Slippage is particularly common in high-volatility or low-liquidity environments. Ignoring this factor can lead to significant losses, especially in leveraged trading, where slippage can significantly affect risk management plans. Reasonably widening stop-loss orders during periods of high volatility can help minimize the risk of significant losses.

Placing stop-loss orders blindly at round numbers: Setting stop-loss orders at round numbers is often very risky. These price levels tend to attract robots and large amounts of money to hunt stop-loss orders or liquidate positions. It is advisable to set stop-loss levels within $100-$500 above or below the round number to avoid falling into this classic trap.

Ignoring dynamic adjustments: If BTC has risen to $95,000, but the stop-loss and take-profit levels remain at $88,000 and $93,000, this may lead to lost profits or facing retracement risks. It is important to regularly monitor BTC price fluctuations to ensure that order parameters can be adjusted in a timely manner. Setting price alerts on the platform is also an effective supportive measure.

Misjudging the market environment: It is essential to make flexible assessments based on market trends. Setting stop-loss levels too tightly before the Fed announces policy or setting profit targets too high in a bearish market can lead to severe losses. Strategies should be timely adjusted based on trends and market sentiment, often by tightening parameters before major events and loosening them appropriately after events. It is also advisable to consider aligning profit targets with technical resistance levels. Not considering commissions: Large orders may incur high commissions; this should be considered when placing orders. To ensure long-term investment profitability, make sure to account for processing fees in the target price, as this will significantly affect the final profit.

Canceling trades out of panic: Emotion-based decisions often lead to significant financial losses. Therefore, it is important to adhere to your original trading plan. This principle is especially important in Bitcoin (BTC) trading, as the Bitcoin market often experiences short-term crashes followed by rapid recoveries. Investors can use trailing stop-loss functions to automatically adjust positions.

The key to avoiding these mistakes lies in building a strategic trading plan, maintaining trading discipline, and adapting to the inherent volatility of the Bitcoin market. Investors are advised to thoroughly test their trading strategies on a demo account before engaging in real trading.