Introduction to Take Profit and Stop Loss (TP/SL)

Stop loss and take profit orders are a fundamental part of trading and can be used as your exit strategy for an opened position. These orders are automatically executed once the price reaches these levels, closing your position for a profit or a loss.

What is a Stop Loss Order?

Stop loss is a price level set by a trader to impose a limit on the maximum amount of money a trader is willing to lose on any particular trade. A stop loss order helps you to cut your losses and get out of an open position if the market is moves against your trade.

Ideally, whenever you enter a position, you should calculate your risk-to-reward ratio and have an idea regarding how much you are willing to risk for a potential reward.

For example, suppose that you open a long position for 1 BTC at price $20,000. Your risk-to-reward ratio for this position is 1:3 or you are willing to risk 5% of your money for a 15% profit.

You can now setup a stop loss at 5% below the order price at $19,000. Once the price of BTC hits $19,000 mark, your open position will automatically close so that you don’t lose more money.

What is a Take Profit Order?

Take Profit is a price level set by a trader to impose a limit on the maximum amount of money a trader will earn on any particular trade. It is a level after at which your profits are realized and your open position is closed. A take profit order helps you to maximize profits in case the market moves in a favorable direction.

Taking the same example mentioned above, suppose that you open a long position for 1 BTC at price $20,000. Your risk-to-reward ratio for this position is 1:3 or you are willing to risk 5% of your money for a 15% profit.

You can setup a take profit level at 15% above the order price at $23,000. Once the price of BTC hits the $23,000 mark, you open position will automatically close, your profits will be realized and moved to your account balance.