A good trading strategy is always not enough to bring you consistent profit in crypto trading. Profitable traders, in most cases, analyze and set up specific market orders and methods to achieve their ultimate financial goals. Utilizing stop-loss and take-profit orders is one way to reduce losses and secure profits.
Let us dig in more and understand the concept of calculating take-profit and stop-loss levels and how they can be used at their best.
What are Stop-Loss and Take-Profit Levels?
A stop-loss level is a predetermined price set by a trader on an asset below the current price and at which the position gets closed to limit the trader's loss on that position.
On the other hand, take-profit levels are preset prices at which traders close their profitable positions. Take profit levels are the opposite of stop loss levels, and the orders are executed automatically.
Basically, all you do as a trader is to let the system know how and when you buy an asset and at what price you want it.
For example, if you want to sell a digital asset and set a stop-loss level at $100, the position will automatically close if the asset drops to $100. As such, you will not lose money if it keeps dropping.
On the other hand, if you want to purchase an asset at $125, you set a take-profit level of $125, and the asset will be bought when it reaches your entered price limit. However, it is essential to note that if the price goes up beyond $125, you will still get the amount of money you had predetermined for the asset, not more.
Additionally, take-profit is primarily common among short-term traders that, in most cases, monitor the market daily or even hourly price moves. Meanwhile, stop-loss is advantageous as you no longer need to micro-manage your portfolio.
Why Use Stop-Loss and Take-Profit Levels
They allow you to exercise your risk management
They help n preventing emotional trading
Stop-loss and take-profit levels are used to calculate a trade's risk-to-reward ratio. In other words, Risk-to-reward ratio = (Entry price - Stop-loss price) / (Take-profit price - entry price).
Calculating Stop-Loss and Take-Profit Levels
The following methods can be used:
Support and Resistance Levels- Most traders set their take-profit level just above the support level and stop-loss level right below the resistance level they have identified.
Moving Averages- Traders monitor moving averages to spot opportunities to sell or buy presented in crossover signals, where two different MAs cross on a chart. Traders using MA identify stop-loss levels below a longer-term moving average.
Percentage Method- Some traders use a fixed percentage to determine SL and TP levels. For instance, they may close their position once an asset's price is 10% above or below the price they entered.
Final Thoughts
The importance of setting stop-loss and take-profit levels as a trader cannot be overemphasized. It's a good trading habit. You can use one or a combination of different methods to calculate your stop-loss and take-profit levels.
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