Starting a crypto trading journey isn’t as easy as it seems. Some traders just put everything in a coin, hoping it makes them millionaires. Trading actually requires a disciplined set of rules including when one plans to exit their trade. Beginner traders would largely benefit from learning about taking profits and setting stop losses. These strategies help one manage investments effectively, ensuring they lock in gains and protect against significant downside. 

Here’s everything a new trader needs to know about these crucial aspects of crypto trading!

Note: Since this article is targeted more towards beginners, it will only be in the context of LONG SPOT positions. 

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What is Taking Profit?

Taking profit (TP) means selling an asset to secure gains when it reaches a predetermined target price. Markets move in waves, meaning sometimes they just move up and sometimes they move down. Therefore, it becomes important to take profits while the price goes up because it will inevitably drop again. 

Imagine a trader entering an asset at $5, and then watching it increase to $20. However, since the trader was greedy and believed it could reach higher, no take profit points were set. After reaching $20, the asset fell back all the way below $5 again. From being at a profit, the trader ended up at a loss. This was a big opportunity cost since the trader could’ve already gained 300% had they took profit at $20 or even at least 100% had they set some take profit points at around $10. Taking profit allows one to lock in their gains and reduces exposure to market volatility to ensure they don’t experience this opportunity cost. 

Instead of having to constantly watch prices to manually exit a position, traders can also automate their take profits. Here’s how!

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How to Set a Take Profit?

1. Apply Technical Analysis: Technical analysis tools like resistance levels, Bollinger Bands, Fibonacci retracements, and moving averages can help identify strategic take profit levels.

2. Determine a Target Price:  Once profit points are identified, a trader should decide on a specific price point to sell to secure profits. There are different ways to set take profit points. Traders could take profit at a resistance level or at a chart pattern target or above a candle wick. Take profit points can also take into account psychological numbers (whole numbers that look appealing,” like 10, 20, 100). A good take profit level should be one where the original trade idea is completed. It is much better to determine a target price based on technical factors, on-chain data, or other credible sources rather than just a “gut feel”. 

3. Set a Sell Order: Trading platforms allow users to set a sell order at a target price. Once the price hits the target, the bought asset will be automatically sold, securing profit.

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What is a Stop Loss?

Conversely, a stop loss (SL) is a strategy where a predetermined price point is set to sell an asset to prevent further losses. Here’s an example: If an asset was bought for $10 with the expectation that it reaches $20 (take profit), an opposite view should also be taken such as if the price falls to $7. 

Stop losses act as a safety net in volatile markets, ensuring that losses are minimized. In the example, the price could’ve fallen even lower than $7, causing further losses. Stop losses minimize loss, and protect one’s capital. Setting stop losses helps protect against significant downturns and maintains a disciplined trading approach. Furthermore, it is very common for traders to end up holding on to losing trades because they did not choose to exit earlier. 

Just like taking profits, stop losses can be automated. 

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How to Set a Stop Loss?

1. Apply Technical Analysis: Technical analysis tools like support levels, Bollinger Bands, Fibonacci retracements, and moving averages can help identify strategic stop loss levels.

2. Determine a Target Price: One should decide on a price point where they would sell to minimize losses. There are different ways to set stop losses. Traders could set a stop loss below a support or chart pattern or below a candle wick. Stop losses can also take into account psychological numbers. A good stop loss level should be one where the original trade idea gets invalidated.

3. Set a Stop Loss Order: Trading platforms allow users to set a stop loss order at a specified price. If the price happens to drop to the stop loss price, the asset will be sold automatically, preventing further loss.

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Common Mistakes to Avoid

• Setting Levels Too Close: Setting stop loss and take profit levels too close to the current price can result in premature triggering. Sometimes traders set stop losses close to their entry price due to fear of losing too much. However, setting it too close will almost guarantee a loss since the stop loss is likely to get it. If a trader buys an asset at $10 and sets a stop loss at $9.9, their stop will likely get triggered. The same concept applies to tight take profit orders. Traders placing take profits too close to their entry price will likely get their take profi orders hit. However, their profit from these trades will be quite negligible. 

• Ignoring Market Conditions: Consider overall market trends and conditions when setting levels. If a market is trending in a direction, it would be wise not to set take profit levels too far against that direction. A downtrend implies that a take profit shouldn’t be set too high and that stop losses on buys should be tighter while an uptrend gives more leeway to set higher take profits and looser stop losses. A sideways market makes it simpler to mark exit levels. Take profit points should be at the top of the sideways range whereas stop losses should be set just below the bottom of the range. 

• Deviating from the trading plan: It is best to stick to a well-defined trading plan all throughout a trade. A trader should decide their stop losses and take profit points before even entering a trade and respect them as the trade plays out. When traders act on their emotions in the middle of a trade and deviate from their plan, they typically tend to lose more money than if they had just followed their initial plan. 

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Taking profits and setting stop losses definitely help in trading, but they alone do not guarantee profits. Studying technical analysis, fundamental analysis, on-chain data, and applying other strategies all improve a trader’s skill set. By continuing to practice and accept both wins and losses, one can truly become a better trader and make it in the markets!

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