Risk Management in Crypto Trading: How Take-Profit and Stop-Loss Orders Work

Main Takeaways

• Risk management techniques such as setting up take-profit and stop-loss orders can help protect your trading account from outsize losses.

• Binance Futures enables users to set TP/SL orders simultaneously to help them better assess their risk-to-reward ratio.

• Some of the most successful traders believe that stop-loss orders can be considered a “free insurance policy.”

We at Binance Futures encourage users to protect their capital by always trading responsibly in the volatile cryptocurrency markets. Self-discipline is one of the most critical traits traders need to develop to avoid compulsive trading. If you ever find yourself in a losing streak, you can enable the Cooling-Off Period function on Binance Futures, which disables trading for an extended period. 

But what could help you the most to prevent massive losses is learning how to identify the right time to enter and exit a trade, and when to abandon a losing trade. By cutting your losses, you can protect your trading account from taking a massive hit. 

You can mitigate risks and keep your emotions in check by setting up take-profit (TP) and stop-loss (SL) orders. This way, you are more likely to lower the stress throughout your trading journey and insulate your decision-making from emotional influences.

What Are Take-Profit and Stop-Loss Orders?

Take-profit and stop-loss orders can be considered part of your exit strategy for each trade you make. These orders are executed once prices reach a predetermined level, closing your long or short position for a gain or a loss. 

Your trading preferences play a significant role in determining where your take-profit and stop-loss orders are placed. Whether you prefer to trade candlestick patterns, chart patterns, trendlines, or technical indicators, with TP/SL orders, you won’t have to worry about exiting a trade or second-guessing your decisions.

For instance, a trader who enters a long position based on an ascending triangle can quickly determine where to place the take-profit and stop-loss orders. The height of the triangle’s Y-axis can yield a potential target, while the pattern’s hypotenuse suggests an invalidation point.  

Remember that each trade you enter requires an exit point – because no one knows what will happen in the cryptocurrency market on any given day. Therefore, take-profit and stop-loss orders help protect you from the unknown and better understand what to expect from each position you open. 

Benefits of Take-Profit and Stop-Loss Orders for Crypto Traders

Take-profit orders close your position for expected gains, while stop-loss orders close your position for expected losses. These orders act as a “free insurance policy” for your trading account, helping you lock in profits and cut losses when the market moves against your positions.

Binance Futures' Advanced TP/SL function simplifies these calculations, allowing traders to set take-profit and stop-loss orders by entering the expected percentage gain or loss expected. Advanced TP/SL also helps set up take-profit and stop-loss orders based on the last price or mark price and displays the estimated profit and loss for take-profit and stop-loss orders.

Take-profit and stop-loss orders give you flexibility to engage in other activities while having an open position. These orders will be automatically executed when the time is right, reducing stress and allowing you to manage your trades more efficiently.

How to Place Take-Profit and Stop-Loss Orders on Binance

You can set your first take-profit and stop-loss order in four quick steps.

1. Identify a Trade Setup: Before you set up take-profit and stop-loss orders, you should identify a trade setup, assess the triggers, and determine your position size. 

2. Choose Your Trading Method: Some traders prefer to trade based on chart patterns, trendlines, or technical indicators. You should have a technical reason for entering a trade and a trigger that will tell you when is the best time to enter.

3. Calculate Risk: Determine what percentage of your available capital you’re willing to risk on a single trade. Remember that you should calculate the risk-to-reward ratio for each trade setup to help you decide if it's worth entering. Ideally, you want to assess the risk versus potential reward. For example, a trade with a 15% profit target and a 5% invalidation point has a risk-to-reward ratio of 1:3 or 0.33, meaning three times the potential reward for each unit of risk.

4. Set Up Your Order on the Binance App: Open the Binance App and go to [Futures]. Check the box next to [TP/SL] to enable input for [Take Profit] and [Stop Loss] prices. You can also click [Advanced] for more precise control over the execution price.

For more information on setting up take-profit and stop-loss orders from the web application, please visit What Are Limit TP/SL Orders and Frequently Asked Questions. 

Put Your Knowledge Into Practice

Crypto traders must manage risks carefully to maximize their returns. A robust risk management strategy can also help to reduce potential losses.

Binance encourages users to practice trading responsibly and have a trading plan. Take-profit and stop-loss orders can lower stress and protect users’ capital.

Remember that you can practice trading in real-time with zero risks in Binance Futures’ Mock Trading. This simulation platform allows you to use testnet funds to experiment with different risk levels to sharpen your trading skills. Once you clearly understand how to set up take-profit and stop-loss orders, you can switch back to trade live on Binance Futures.  

Further Reading

• 10 Reasons Why You Should Trade on Binance Futures

• Crypto Futures Trading: Things You Need to Know Before You Begin

• Crypto Futures Risk and Money Management: 5 Things You Can Do to Better Manage Trading Risk