Do you already know about cryptocurrencies, trading, and even registered on several exchanges? Great. Now is the time to learn all the facets of cryptocurrency trading and answer the question: “How to trade cryptocurrency?” In this article, we`ll tell you about such basic orders as Stop Loss, Take Profit, and Trailing stop. You will master the theory (yes, boring terms will be here too), learn about their advantages and disadvantages, and also be able to conclude what to use in your trading.
Some boring terms
Stop Loss – orders to minimize losses in case the price starts moving against your position. This order execution leads to the position closing with a loss. Stop Loss is always associated with an already open position in the market or with any type of pending order. It is used to minimize risks and manage an open position.
Take Profit – orders that fix the profit when the asset price reaches a certain level. Take Profit execution leads to the position closing with a profit. This order is also always associated with an open position in the market or with a system of various pending orders.
Trailing stop is often used by traders instead of a pending Stop Loss order. It is set at the distance the trader needs from the current price. If the price moves towards increasing profit, the trailing stop order automatically changes the Stop Loss level, following the price at a distance set by you. If the profit decreases, the trailing stop order remains in place and upon reaching its level, the profit is fixed automatically. On the one hand, a trailing stop order fixes the profit amount you`ve determined for a position, and on the other hand, it doesn`t limit its further growth.
Stop Loss in details
When we`re dealing with a volatile cryptocurrency market, the biggest challenge is limiting losses. Unfortunately, many investors have learned about this from their own experience. For example, Bitcoin tries to rise to at least $10,000 but still falls below $9,000. Fortunately, there is a solution – automatic selling when it falls to a certain price (Stop-loss is available on Binance).
Stop loss in paper trading is intended to limit the investor’s losses. Although most investors have a long position in mind when talking about a stop loss, it can also help protect a short position – in this case, the asset is purchased when its price rises to a certain level.
Stop losses will help you save your money or avoid getting from a bad situation to a worse one. I mean limiting losses. You choose a level that is comfortable for you, and thus you get some wiggle room in anticipation that the asset will rise in the price back. Moreover, the stop loss will also help you get some profit at least. You expect the green candle to get even higher, but you want to guarantee a profit. A beginner just buys an asset and hopes that it`ll cost more tomorrow, but we assume that you`re ready to learn something.
There are several types of stop loss: fixed, dynamic, and trailing stop loss.
Fixed stop loss is the simplest method. For example, you have 1 Bitcoin, but you`re worried that its price will fall below the $9 thousand overnight. You place a stop loss, thus placing an order on the exchange so that when the price falls below 9 thousand, your Bitcoin is immediately sold.
However, a situation may arise when overnight the price may both fall and rise relative to the declared level. Then the loss cannot be avoided if you want to keep bitcoin on your balance.
Against the background of the above disadvantage, you can use the dynamic stop loss. In this case, if the value falls below 9 thousand, half of the existing asset will be sold. If the price rises, half of the bitcoin will still be available, which can be sold if the falling continues to be bought again at a low price later. That is, with a reverse price increase, the investor will be in a better position than with a fixed stop loss. There is also a flaw here: if the price stops near the mark of about 9 thousand, it turns out that the rest of the asset will have to be sold at a reduced price.
Some words about Take Profit
Take Profit order plays a key role in the strategies of many traders and is used with different assets. When prices start to rise, orders serve as an upper limit and ensure that assets are sold before prices start falling again. Imagine a poker player knows exactly when to leave the table.
A trader usually chooses an activation price for his take profit order based on technical analysis. Typically, these orders are used for short-term trades as they can significantly reduce profits when a trader has chosen a long-term strategy.
Take profit order helps to avoid emotions during the trading process. When opening a trade, you can safely choose the price at which you will be ready to exit, instead of succumbing to emotions and selling assets too soon or too late. They also eliminate the need for traders to manually sell their assets and monitor prices throughout the day.
Although take profit guarantees a profit, it is possible that the order will be executed and prices will continue to rise. Accordingly, you may be missing out on more substantial profits. There is also a human error, so always check that the settings are correct to avoid costly mistakes.
Trailing stop in action
A trailing stop order allows investors to automatically adjust the price at which they`re ready to sell an asset in accordance with changes in its price. Such orders are usually used in the stock market and guarantee that the investor doesn’t lose profit in the sudden volatility event.
Trailing stop orders track market movements. If the prices rise or fall, the limit at which a trader will sell increases or decreases with them.
The challenge for traders who use a trailing stop order is to find a middle ground between too small and too large a limit. If the limit is set too close to current prices, it`s possible that normal market fluctuations could cause unwanted selling. A trailing stop order that is placed too far from the current market prices creates the same problem as a fixed stop loss: it cannot fix profits.
Instead of an afterword
We hope that you became a more advanced trader and you`re ready for the real work now. And if you value your time and comfort, then you`ll like the professional app for cryptocurrency trading – GoodCrypto. Use this knowledge and send stop loss and take profit orders to Binance and any of 20+ exchanges.