How Take-Profit and Stop-Loss Orders Can Help Traders Manage Risk Better
Main Takeaway:
Risk management techniques such as setting up take-profit and stop-loss orders can help protect your trading account from outsized losses.
Binance Futures enables users to set TP/SL orders simultaneously to help them better assess their risk-to-reward ratio.
Some of the most successful traders believe that stop-loss orders can be considered a free insurance policy.
Cryptocurrencies offer unique opportunities for traders to profit because of their high volatility. But without proper risk management, any winning trade can turn into a losing trade really fast. This is why you should have a solid trading plan to avoid making emotional decisions.
Binance Futures encourages users to protect their capital by trading responsibly in the volatile cryptocurrency markets. Self-discipline is one of the most critical traits traders need to develop to avoid compulsive trading or gambling. If you ever find yourself in a losing streak, you can enable the Cooling-Off Period function on Binance Futures, which disables trading for an extended period.
But what would help you the most to prevent such unfortunate events is learning how to identify when is the right time to enter and exit a trade and when to abandon a losing trade. By cutting your losses short, you can protect your trading account from outsized losses.
You can mitigate risks and keep your emotions in check by simply setting up take-profit (TP) and stop-loss (SL) orders. This way, you are more likely to lower the stress throughout your trading journey and insulate your decision-making from emotional influences.
Take-Profit and Stop-Loss Orders
Take-profit and stop-loss orders can be considered part of your exit strategy for each trade you make. These orders are executed once prices reach a predetermined level, closing your long or short position for a gain or a loss.
Your trading preferences play a significant role in determining where your take-profit and stop-loss orders are placed. Whether you prefer to trade candlestick patterns, chart patterns, trendlines, or technical indicators, with TP/SL orders, you won’t have to worry about exiting a trade or second-guessing your decisions.
For instance, a trader who enters a long position based on an ascending triangle can quickly determine where to place the take-profit and stop-loss orders. The height of the triangle’s Y-axis can yield a potential target, while the pattern’s hypotenuse suggests an invalidation point.
Be aware that each trade you enter requires an exit point because no one knows what will happen in the cryptocurrency markets on any given day. Therefore, take-profit and stop-loss orders help protect you from the unknown and better understand what to expect from each position you open.
Benefits of Take-Profit and Stop-Loss Orders
Although take-profit and stop-loss orders are used to close a position, they are entirely opposite of each other. Take-profit orders are executed to close your position for expected gains. Meanwhile, stop-loss orders are executed to close your position for expected losses.
Remember that you should calculate the risk-to-reward ratio of each trade setup you identify to evaluate whether it’s worth entering a position. Ideally, you want to determine how much risk you are taking for potentially how much reward.
For instance, a trade setup with a profit target of 15% and an invalidation point of 5% has a risk-to-reward ratio of 1:3 or 0.33. This means that for each unit of risk, there is three times the potential reward.
Binance Futures makes these calculations easier with its Advanced TP/SL function. It allows traders to set the take-profit and stop-loss orders by entering the percentage gain or loss expected. Advanced TP/SL also helps set up take-profit and stop-loss orders based on the last price or mark price and displays the estimated profit and loss for take-profit and stop-loss orders.
Take-profit and stop-loss orders represent one of the best ways to mitigate risk. A take-profit order helps you lock profits when you have accurately anticipated a market movement. On the other hand, stop-loss orders help you cut losses when the market moves against your positions. Consequently, acting as a free insurance policy for your trading account.
You can also have the flexibility to engage in other activities while having an open position because the take-profit and stop-loss orders will be automatically executed when the time is right.
How to Place Take-Profit and Stop-Loss Orders
Before you set up take-profit and stop-loss orders, you should first identify a trade setup, assess the triggers, and determine your position size.
Some traders may prefer to trade based on candlestick patterns, chart patterns, trendlines, or technical indicators. Regardless, you should have a technical reason why you want to enter a trade and a trigger that will tell you when is the best time to enter the trade. With this information, you can then determine what percentage of your available capital you’re willing to risk on a single trade.
On the Binance App, it’s very easy to set up take-profit and stop-loss orders while entering a position. Go to [Futures] and check the box next to [TP/SL], which will enable you to input the [Take Profit] price and the [Stop Loss] price. You can also click [Advanced] to have more precise control over the execution price.
For more information on setting up take-profit and stop-loss orders from the web application, please visit What Are Limit TP/SL Orders and Frequently Asked Questions.
Put Your Knowledge Into Practice!
When trading futures, traders need to manage risks properly to stay consistent in maximizing returns. A robust risk management strategy can also help to reduce potential losses, mainly because the cryptocurrency market is highly volatile.
Binance Futures encourages users to practice trading responsibly by having a proper trading plan. Take-profit and stop-loss orders can lower stress and protect your investment capital.
Feel free to practice trading in real-time with zero risks in Binace Futures’ Mock Trading. This simulation trading platform allows you to use testnet funds to experiment with different risk levels to sharpen your trading skills. Once you clearly understand how to set up take-profit and stop-loss orders, you can switch back to trade live on Binance Futures.
Read the following helpful articles for more information about Binance Futures:
(Blog) Crypto Futures Trading: Things You Need to Know Before You Begin
(Blog) Crypto Futures Risk and Money Management: 5 Things You Can Do to Better Manage Trading Risk
(Academy)The Psychology of Market Cycles
And many more Binance Futures FAQ topics
Risk warning: Cryptocurrency trading is subject to high market risk and price volatility. You should only trade or invest in products that you are familiar with and understand the risks associated with them. You should carefully consider your investment experience, financial situation, investment objective, risk tolerance level and consult your independent financial adviser as to the suitability of your situation prior to making any investment or trades. The material on this site is provided for information purposes only and should not be construed as financial advice. Past performance is not a reliable indicator of future performance. You should note that the value of an investment and any returns can go down as well as up, and you may not get back the amount you had invested. You are solely responsible for the trading or investment decisions that you have made. Binance is not responsible for any trading losses that you may incur. Further details can be found in our terms of use.