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Stop loss orders
A stop loss order automatically closes the trade when the asset price reaches a certain level. Stop loss orders, as their name implies, are designed to limit potential losses if the market moves in the opposite direction of your trade. They are a fundamental tool for properly managing risk.
How to use stop loss orders
Stop orders based on a percentage: The stop loss is set at a certain percentage below the entry price. For example, if you bought Bitcoin at $40,000 and set a stop loss at 5%, your trade will close if the BTC price drops to $38,000.
Technical stop loss order: A stop loss order is placed at a certain support level or below a significant moving average. For example, if BTC is trading above the 200-day moving average at $37,000, you can place the stop order at any level below $37,000.
Advantages
Providing a clear plan for risk management
Automating the exit process, reducing emotional interference in decisions
2. Profit targets
Take profit orders are similar to stop loss orders, but they secure your profits instead of minimizing your losses. These orders are designed to automatically sell your trades when the price reaches a certain profit level. Take profit orders can help you realize gains without waiting for the 'perfect' exit.
How to set profit targets
Risk-to-reward ratio: You can use a risk-to-reward ratio, such as 1:2, which means you aim to earn two dollars for every dollar at risk. If the stop loss level is $1,000 below the entry price, you can set a profit target $2,000 higher.
Fibonacci levels: One other option is to use Fibonacci retracement and extension tools to identify potential profit levels. For example, a Fibonacci extension level of 1.618 typically forms a major take profit area.
Advantages
Preventing overtrading due to greed
Helping achieve continuous profits by focusing on specific goals
