Take Profit (TP) refers to locking in gains by selling and no longer holding the position when a profit has already been made, thereby ensuring that the profit is actually realized.
By contrast, Stop Loss (SL) means closing a position at a loss. Even when the position is currently losing money, the trader chooses to sell early in order to avoid greater losses.
Usually, take profit and stop loss are set together with specific conditions. For example, taking profit only when the price rises above a certain level, or cutting loss when the price falls below a certain level. This specific condition is called the trigger price.
As for how the trigger price should be set, that depends on each investor’s trading habits. Some people regard support and resistance levels as useful reference points, while others prefer indicators such as moving averages.
Most major trading platforms generally provide take profit and stop loss functions, allowing investors to set the relevant price levels at the same time as placing an order. In this way, even without spending time monitoring the market, the system can automatically complete the buy and sell operations.
Why Is Take Profit and Stop Loss Necessary?
1. Risk Control
The core purpose of take profit and stop loss is to control risk and avoid the situation where a cryptocurrency rises and then falls back down, or where losses on principal force one to exit the market.
Have you ever experienced this: you see the price rising, assume it will continue to rise further, and therefore refuse to sell. Unexpectedly, the price then keeps falling, and all the unrealized profit turns into a loss.
If take profit had been set at that time, you might have missed some of the later upside, but at least you would have genuinely secured the money.
There is another situation: after the price falls, you are unwilling to accept the loss, so you continue to hold the position. Unexpectedly, the decline becomes larger and larger, and even the principal is completely lost.
If stop loss had been set at that time, it would still hurt, but at least part of the principal could have been recovered, and there would still be a chance to remain in the market and wait for the next investment opportunity.
2. Stabilizing Trading Psychology and Clarifying Strategy
Take profit and stop loss can also effectively prevent emotional fluctuations from affecting trading decisions, thereby avoiding mistakes.
Because the take profit and stop loss levels are clear numerical values, once they are set, the system will automatically execute the trade as soon as the price touches those levels, completely eliminating human interference.
In this way, you will no longer become overexcited simply because the price keeps rising and assume that even more profit can still be made; nor will you hesitate when the price falls, unable to bear cutting the loss.
In addition, only after implementing a take profit and stop loss strategy can you clearly determine whether your trading strategy is effective. If the overall result remains a loss after being applied over a long period, then the strategy needs to be adjusted.
3. Understanding the Risk-Reward Ratio
Experienced investors also use take profit and stop loss to control the risk-reward ratio. Before entering a trade, they evaluate the take profit and stop loss levels in order to judge whether the trade is worth taking.
For example, when entering at a certain price, there may be an 80% probability of taking profit and earning a 10% return, and a 20% probability of hitting stop loss and suffering a 30% loss. Since 80 × 10 > 20 × 30, this trade is worth entering.
Suppose you buy a certain coin at a price of 1000 and hope to make a profit of 200. Then the take profit level should be set at 1200. This logic is easy to understand. Even if you do not place a take profit order, you can still manually place a sell order at 1200 as usual.
However, if you believe you can only tolerate a maximum loss of 100, that means you need to sell when the price falls to 900. But if you simply place a sell order at 900 at that moment, it will be executed immediately, because the current market price is 1000.
In this case, the 900 level must be placed under the stop loss function, and it may even need to be set through a trigger price.
For example, if the trigger price is set to 900 and the stop loss price is set to 890, then when the price reaches 900, the system will automatically place a sell order at 890 for you, so that it will not be executed immediately at the 1000 level.
However, setting a trigger price does not necessarily mean that take profit or stop loss will be completed smoothly. After activation, if the price does not reach the take profit or stop loss execution level, the order still will not be filled unless market execution is selected.
What Does Trailing Take Profit and Stop Loss Mean?
Trailing take profit and stop loss means that instead of using a fixed price as the take profit or stop loss level, the timing is determined by a relative price or a percentage.
For example, if a coin is priced at 1000 and a trailing stop loss of -200 is set, the following two stop loss situations may occur:
- If the coin price first rises to 2000, the stop loss level will be adjusted to 1800. When the price later falls to 1800, the stop loss will be triggered. Although this is technically a stop loss operation, the actual profit is 800.
- If the coin price directly falls to 800, the stop loss is triggered immediately.
In other words, when the price moves in a favorable direction, the stop loss level also moves accordingly. This creates the opportunity to capture more profit and avoids having profit potential restricted by a fixed number.
Is the trigger price for take profit and stop loss the same as the execution price? No. The purpose of the trigger price is to activate the take profit or stop loss order. Only after the order is triggered does it enter the market and wait to be filled. The actual execution price may differ from the trigger price. Even for a market order, there may still be a difference from the trigger price due to market volatility.
Why Does Liquidation Still Occur After Setting Take Profit and Stop Loss?
In general, this happens because the stop loss trigger price is set too close to the liquidation price. When market volatility is severe, the price may directly reach the liquidation level, causing the stop loss order not to be placed or executed in time. Alternatively, if the trigger price and the order price for take profit or stop loss are set to the same level, the stop loss may fail to be filled in time during price volatility, causing the loss to expand further until liquidation is reached.
Example
In a BTCUSDT perpetual contract, a long position sets the stop loss trigger price at 106530 USDT. However, due to a sharp market decline, when the price only just touches 106526 USDT, the system has already triggered liquidation directly. Since the stop loss order has not yet been placed or filled, the system cancels the stop loss order and executes liquidation, resulting in a forced close of the position.
Why Is There a Price Difference After Take Profit and Stop Loss Are Triggered?
When choosing limit take profit and stop loss or market take profit and stop loss, once the price reaches the trigger price, your order will enter the market according to the set limit price or market price for matching and execution. Due to market price fluctuations and order-book conditions, the actual execution price may differ from the take profit and stop loss price you set, which may increase or decrease trading costs.
Please note that the trigger price of a take profit and stop loss order ≠ the order price ≠ the execution price. Therefore, we recommend that you manage trading risk properly in order to avoid the potential impact caused by price differences.
For example, in a BTCUSDT perpetual contract long position, if limit take profit and stop loss are set, and both the take profit trigger price and the order price are 107600 USDT, the intention is to close the long position for profit at 107600. However, the actual average execution price is 107698.2 USDT, creating a price difference from the set level. Although the higher price increases take profit gains, in extreme market conditions unfavorable slippage may also occur, leading to higher costs.