Take Profit (TP) and Stop Loss (SL) are invaluable tools that allow you to establish automated exit strategies for your trading positions.
Take Profit (TP) is employed to set a predetermined level at which your position will automatically close, securing a profit. Conversely, Stop Loss (SL) is utilized to set a specific condition that, when reached, triggers an automatic closure of your position, limiting potential losses.
Both TP and SL can be applied to various order types, including Market, Limit, Stop Market, and Stop Limit orders.
How does it work?
Consider the example of Jack placing a MARKET BUY order for BTC. He sets a TP at 30,000 and an SL at 28,500. At the time of order placement, the Last Traded Price (LTP) was 29,000. Upon initiating the BUY order, two parallel SELL Limit orders are generated. One corresponds to the TP of 30,000, while the other relates to the SL at 28,500. Notably, these TP and SL orders are exclusively designed to reduce or close an existing position, devoid of the capability to create new positions.
Continuing with this scenario, if the LTP reaches 30,000, the Take Profit (TP) order will be executed, resulting in the closure of the position at 30,000. Consequently, Jack will have no active positions. As for the SL LIMIT order, it is automatically annulled upon execution of the TP order. In essence, a symbiotic relationship exists between TP and SL orders, wherein the activation of one leads to the cancellation of the other. Once TP is triggered, SL is nullified, and conversely, when SL is triggered, TP is voided.
Subsequently, Jack decides to set a LIMIT BUY order for ETH with a Limit Price of 1800. Additionally, he sets a Stop Loss (SL) at 1700 and a Take Profit (TP) at 1900. The LTP at the time of order placement was 1920.
It is imperative to recognize that TP and SL orders associated with Limit orders exclusively become active following the execution of the LIMIT order, converting it into a position. Hence, for Limit orders, the original LIMIT order and its corresponding TP/SL orders establish a sequential link, wherein one triggers the other. Specifically, the TP/SL orders come into play only upon the successful execution of the Limit order.
Once the Limit order is transformed into a position, the TP/SL orders are set in motion. Analogous to market orders, when the TP is achieved, the SL order is revoked, and vice versa.
Why should I use it?
Figuring out when to exit the market is vital. How many times have you heard (or experienced) this story: ‘I was positive till yesterday night, but today when I woke up I got liquidated’. You ask yourself, ‘If only I had taken the profit’ when it was there, ‘If only I had known when I was losing, I could have stopped my loss’
Putting a TP/SL allows you do just that. Instead of you having to constantly monitor the market, you can specify your risk appetite and be sure that your losses will be limited.
How to set TP and SL?
You can place TP and SL while creating a new order or on an open position.
Putting TP/SL while creating a new order
- For all order types, while putting Leverage and quantity, you will also see a toggle for TP/SL
Toggle it on and then select the condition type using which you want to set your TP and/or SL. You can choose from:
Price: - Last Traded Price
Amount(P&L) : - Eg: Take profit when my unrealized PnL is 5 USDT. Stop loss when it’s 2 USDT
ROE%: - Calculated as % of the Margin Used
- In case you chose Price, enter the LTP when you want the TP/SL to hit. You will also see an estimated PnL for each scenario if it happens
- Place the order by clicking Buy/Long
- If it’s a market order, the TP/SL can be seen by clicking on the edit icon in the positions row.
- In case of a Limit order, you can see the corresponding TP/SL orders associated with the Limit order by clicking the edit icon in the Open orders tab. Note that till the Limit order is not executed, you can modify the TP/SL values.
Putting TP/SL in a position
If you did not add a TP/SL when creating the order OR you want to add a new TP/SL on an existing position, just click on the edit icon in the positions row
Here you can put your TP/SL using the different condition types mentioned and an estimate PnL for the same.
Watch this video to know more :