Achieving results trading crypto boils down to minimising your losses and maximizing your returns. That is why it is important to know how to set stop loss and take profit in trading. But many traders just starting out in the crypto markets have a tough time determining how and where to set their stop losses and how much profits they should take.
Setting stop losses too close to your entry price might reduce your risks but it might cause you to get stopped out of your positions frequently. Set it too far and you risk losing a larger amount of your capital.
When it comes to profit-taking, holding your position longer can potentially result in a larger gain. But hold too long and you might give back some if not all of your profits. Take your profits too soon and you might miss out on a bigger move.
So what should you do? In this article, we will take a look at how to set stop loss and take profit in crypto.
Why Should You Set Stop Loss And Take Profit In Crypto
There are many reasons why you should set stop losses and take profit in crypto. These are some of the following reasons:
Reduce and keep emotions to a minimum when trading
Setting stop losses and taking profit in advance can help reduce and keep your emotions to a minimum when trading. Having emotions while you trade can interfere with sound decision making such as keeping a trade open for too long or taking profits too early. Over time, this will affect your profitability.
Free up time
Instead of spending all your time in front of the screen monitoring crypto prices, predetermined stop loss and take profit levels allow you to achieve your desired outcome without having to monitor the charts all day.
Helps with risk management
Having predetermined stop loss and take profit levels allow you to maintain a tight risk management strategy. The effective use of these levels will allow you to have a favourable risk-to-reward ratio and an edge in the markets.
Risk To Reward Ratio
Before we take a look at the different tactics of setting stop losses and taking profits, we need to first understand the risk-to-reward ratio concept. Risk to reward ratio details the potential reward or returns a trader can earn for every dollar they risk on a trade.
The risk-to-reward ratio allows traders to determine the potential profit of a trade to its potential loss. You can calculate the risk-to-reward ratio by taking the difference between the entry point of a trade and the stop loss point (risk) divided by the difference between the profit target point and the entry point (return).
For example, if you buy Bitcoin (BTC) at $10,000 and set your stop loss at $9,500, your potential risk will be $500. If you set your profit target at $11,500, the potential profit on your trade will be $1,500. Thus, your risk-to-reward ratio will be 1:3 which means that for every $1 you are risking, you can potentially earn $3.
The reason why the risk-to-reward ratio is so important is that the higher the risk-to-reward ratio, the greater the number of times you can be wrong and still make a profit and/or break even. With a risk-to-reward ratio of 1:3, you can be right just once and be wrong three times and still break even. Losing trades are part and parcel of trading in the crypto markets thus having a strong risk-to-reward ratio helps build in these failures in your trading.
Most traders are too focused on winning vs. losing. I focus on how much I win vs. how much I lose keeping my risk/reward ratio at a wide enough margin that I can be wrong many times and still not get into trouble. It's a counter-intuitive concept I call "Building in Failure."
— Mark Minervini (@markminervini) December 9, 2021
How To Set Stop Loss In Crypto
A stop loss is an advanced order placed with your broker to automatically sell your crypto position once prices reach a particular price point. There are multiple ways to set stop losses when trading crypto but all of them are still based on one overarching concept: setting stop losses as a function of your gains.
What this means is that regardless of your stop-loss tactic, your stop-loss and your risk should always be smaller than the rewards and gains you are achieving from your trading.
For example, if the average gain you are getting on your trades is 15%, the risk you take on any single trade should not exceed 15%. So if your entry price is $1000, your stop loss should not be placed any lower than $850.
Ideally, your average gain should be multiples of your risk. Using the example above, with an average gain of 15%, you can limit your risk to 5% or 7.5% for you to achieve a risk-to-reward ratio of 1:3 and 1:2 respectively.
How To Take Profit In Crypto
Getting into a trade is the easy part, getting out is the challenging part especially when it comes to taking profits. “What if I had held on to my position longer, I could have rode the wave up.” “What if I sold earlier, I could have locked in more profits.” These are the questions that most traders face when it comes to taking profits. Everyone wants to make as much money as possible out of a trade and sell at the top. However, the reality is that most traders will either sell too soon or sell too late.
As such, taking profits is one of the emotionally challenging tasks that traders face in the crypto markets as they are always confronted with the “what ifs”. So how should you take profit in crypto?
The first step is to understand that no one can consistently sell at the top, not even the best traders. So instead of beating yourself down for not being able to sell at the top, focus on asking yourself these questions.
- Did the reason(s) why you bought the coin change?
The key before entering any trade is having a plan. It can be derived from fundamental analysis or technical analysis or even both but you need to have reasons why you bought that particular coin. Entering a trade with a clearly defined plan allows you to know when things are not going your way and when you should take profits and exit your trade.
For example, if you bought the coin because it was trading above its moving average but is now trading below it, you can look to take profit and exit the trade since the reason you first bought the coin is now no longer valid.
- What is your profit target?
Setting a profit target even before you enter a trade can help to remove the indecision that most traders find themselves stuck in when deciding whether to take profit or hold on to their positions.
For example, before you enter a position in BTC at $10,000, you decide to set your profit target at $11,500. After you bought, BTC quickly rose and reached $11,500 in a matter of days. Without a profit target, most traders would probably face the dilemma of holding on to the position or taking a profit. But with a take profit level set in advance, you will know exactly when to exit your position and take profit.
Here are some ways that you can use to set your profit target.
- Taking profits at major support or resistance levels
Support and resistance are price levels/zones where there is an increase in the amount of trading activity, be it buying or selling. Buying demand tends to outstrip supply at support levels which causes price declines to halt and reverse. The converse is true for resistance levels.
Traders with long positions tend to set their take profit level just below a resistance level and just above a support level for short positions. You can read more about support and resistance levels here.
- Taking profits at the peaks and troughs of Fibonacci levels
Fibonacci levels, which stem from Fibonacci numbers, highlight the different potential levels of support and resistance. Fibonacci numbers are found throughout nature and many traders believe that these numbers are just as prevalent in the financial markets.
Traders can use the Fibonacci levels as potential areas of support and resistance and set their profit targets accordingly.
- Taking profits based on key moving averages
Moving averages are trading indicators commonly used by crypto traders to analyze price trends. Moving averages are calculated based on the average price of the asset over a specific period. Many traders monitor moving averages closely and use them to provide buy and sell signals.
Typically, traders buy when prices are trading above a key moving average and sell when prices trade below a key moving average.
- Taking profits based on the percentage method
Instead of setting profit targets using technical indicators, some traders use a fixed percentage to determine their take profit levels. For example, you can choose to take profit once prices move 15% above your entry price.
What Are Stop Loss And Take Profit Orders
Stop loss and take profit orders are price orders that traders set in advance. These price orders allow traders to set predetermined price levels to buy and sell their cryptos to keep emotions during trading to a minimum.
A stop loss is a limit order that you can place in the markets to specify how much you are willing to lose on the trade. A take profit order works the opposite of a stop loss order. It allows you to specify the price that you want to close your trade for a profit.
Stop loss and take profit orders are limit orders which are set at predetermined prices. If the conditions are met, the orders will be triggered. If the conditions are not met, the order will remain untriggered.
Traders should always have a plan before entering a trade in the crypto markets. The two important components in any trading plan are having a clear idea of where to set stop loss and where to take profit. A sound strategy for setting stop losses and taking profit can help to improve your performance in the crypto markets by providing you with a systematic way for you to minimize your losses and maximize your returns.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.