What is the difference between a stop-loss and take-profit order?

Although very similar, there are subtle differences between a stop-loss and a take-profit order.

A stop-loss order enables you to automatically buy/sell contracts at a particular price so as to limit losses for short/long positions, whereas a take-profit order enables you to automatically buy/sell contracts at a set point to take profit on short/long positions.

For example, if a trader has a long position size of 10,000 and the current BTCUSD price is $10,000, a trader might decide to set a stop-loss order on his long position at $9,500 meaning selling his long position when the price drops to $9,500. Alternatively, he can decide to set a take-profit order that automatically sells his 10,000 contracts when the BTCUSD price hits $10,500.

What are the benefits of trading with stop-loss and take-profit orders?

Stop-loss and take-profit orders are common risk management strategies utilized by traders. In theory, both enable traders to exit the market at the right time using predetermined triggers.

As a trader, this strategy gives you the opportunity to circumnavigate major losses and work successfully within a volatile market. One of the most significant obstacles in successful crypto derivatives trading is human emotion. It’s incredibly easy to get excited as the price of a contract rises but it’s very difficult to predict when it might tumble.

Stop-loss and take-profit orders eliminate emotional decision making. Once your set limit is reached, the trading process is automatic. They also work while you sleep. No-one can monitor the markets 24/7, so an automated tool that does it for you will ensure you don’t suffer any significant losses.

Stop-loss and take-profit orders eliminate emotion from the trading process.

When should you use stop-loss and take-profit orders?

Stop-loss and take-profit orders are useful risk management tools at any time. That said, there are some scenarios when it would be best to use them as part of an overall trading strategy.

For example, if your aim is to make a quick profit by benefiting from advantageous market conditions, a take-profit order will help you achieve this result. This mechanism ensures that you can profit from a bull-run without suffering major losses. That said, a take-profit order isn’t suited to more long terms strategies. One of the main reasons for this is that the order doesn’t take into account trends that take longer to develop.

In terms of stop-loss orders, the strategy is slightly different. As they are in place to minimize losses as opposed to establishing quick profits they do suit a long-term investment strategy. For example, a trader could set a stop-loss on a historically stable contract or currency and make more aggressive trades elsewhere.

Where should you place the order?

In terms of choosing where to place a stop-loss order, the key consideration is how far away it is from the existing price. Setting an order too far away from this position could easily result in major losses. On the flip-side, setting it too close could mean your trade closes too quickly.

There are a number of methods used by traders to decide at what price the optimal placement should be, including calculating the moving average and swing trading, but the most popular method is determining the percentage you are comfortable losing.

With take-profit orders, the same rules apply. In essence, it’s about analyzing the market and determining how well a contract has performed so you can set your expectations accordingly.

Read our guide on how to set up stop-loss and take-profit orderson C-Trade and start trading today.

There are numerous methods to decide at what price to place a stop-loss or take-profit order.