Abstract

Many traders rely on the two key points of take-profit point and stop-loss point to determine their trading exit strategy. The specific point depends on how much risk they are willing to take. These two thresholds are used in both traditional and cryptocurrency markets, and are especially popular among traders who prefer technical analysis methods.

Introduction

Opportunistic entry and exit refers to the process by which investors and traders Predict future market prices and determine the optimal price level for buying and selling assets. In this strategy, timing your exit is crucial. This is where the take-profit and stop-loss points come in handy.

The stop-profit point and stop-loss point are the target prices set by traders in advance. Disciplined traders often use these predetermined prices as part of their exit strategy. Predetermined prices are designed to avoid emotional trading as much as possible and are crucial for risk management.

Stop loss point and take profit point

Stop loss (SL) is a predetermined price below the current price of the asset. Once the stop loss point is reached, the system will close the stop loss. The profit take point (TP) is also the predetermined price. Once this point is reached, the system will close the position and take profit.

Traders do not need to use real-time current price orders and can track market conditions around the clock. After a preset price, an automatic sell-off mechanism is triggered once that price is reached. Binance Futures includes the above-mentioned stop-profit and stop-loss functions. The system will decide whether to take profit or stop loss based on the trigger price and the last price or the mark price when placing the order.

Why set profit-taking and stop-loss points?

Carry out risk management

Take profit and stop loss points reflect the current dynamics of the market. Determining the optimal value is essentially determining your acceptable risk level and seizing favorable trading opportunities. Assessing risk using take-profit and stop-loss points can play a key role in maintaining and growing your investment portfolio. Prioritizing lower-risk trades can fully protect your holdings and prevent your investments from going down the drain. Because of this, many traders use take-profit and stop-loss points in their risk management strategies.

Prevent emotional trading

At any time At times, a person's emotional state can heavily influence decision-making, which is why some traders rely on preset strategies to avoid trading under the dictates of stress, fear, greed, or other powerful emotions. Learning to identify when to close a position can help avoid impulsive trading and allow you to be more strategic when trading.

Calculate risk-reward ratio

Stop-loss and take-profit points can be used to calculate the risk-reward ratio of a trade.

Risk-reward ratio measures the amount of risk taken in exchange for potential reward. Generally speaking, it's better to enter trades with a lower risk-to-reward ratio because it means the potential profit outweighs the potential risk.

The following formula can be used to calculate the risk-reward ratio:

Risk-reward ratio = (entry price - stop loss price) / (take profit price - entry price)

How to calculate the stop loss point and sum Take Profit Point

Traders can use various methods to determine the best stop loss and take profit points. Calculations can be made using one method alone or multiple methods combined, but the goal is to use existing data to make more informed decisions about when to close a position.

Support and resistance levels

Support and resistance levels are core concepts familiar to every technical trader, whether in traditional or cryptocurrency markets.

Support and resistance levels are areas on the price chart with a higher likelihood of increased trading volume. The trading volume here includes buying volume and selling volume. At the support level, the price decline is expected to pause due to increased buying volume. At resistance levels, price gains are expected to pause due to increased selling volume.

Traders who use this method usually set their take-profit above support and their stop-loss above below the resistance level.

Click here to learn more about the fundamentals of support and resistance levels.

Moving average

This technical indicator filters out market noise and smoothes price action data to reveal changing trends.

Traders can draw short-term or long-term moving averages according to their preference. Traders who follow moving averages closely will watch for the intersection of two moving averages on the chart to take advantage of the cross signal to signal selling or buying opportunities. You can read a detailed explanation of moving averages here.

Typically, traders who use moving averages will place their stops below the long-term moving average.

Percent method

Some traders use fixed percentages to determine take profit and stop loss points, rather than predetermined prices calculated using technical indicators. For example, they can choose to close their position when the asset price is 5% above or below the entry price. This method is simple and straightforward and suitable for traders who are less familiar with technical indicators.

Other indicators

We've already mentioned a few common technical analysis tools for determining take profit and stop loss levels, but traders also use many other indicators, including the Relative Strength Index (RSI), Bollinger Bands (BB), and Exponential Moving Average (MACD). Relative Strength Index is a momentum indicator that indicates whether an asset is overbought or oversold; Bollinger Bands measure market volatility; and Exponential Moving Average uses exponential moving averages as data points.

Summary

Many traders and investors use one or more of the above methods to calculate stop loss and take profit points. These points are technical signals to exit a trade, prompting traders to abandon losing positions or realize potential profits. Please note that each trader has his or her own take profit and stop loss points. These points do not constitute a profit guarantee, but can only be used as a guide for decision-making, allowing traders to have a more holistic view and be more targeted when making decisions. In this regard, it is good trading practice to assess risk by identifying stop loss and take profit points or using other risk management strategies.