In our previous article about trading in a cryptocurrency environment, we defined market and limit orders. We have also explained that a market order will always incur a taker fee, which is larger than the maker fee incurred by the limit order when well placed. We mentioned that a limit order could also incur a taker fee in the case the limit price is chosen above the market price for the buy limit order, and below the market price for the sell limit order. In this article, we will briefly define and explain what we understand about the take-profit and stop-loss orders.
What is a take-profit order?
As it is named, the take-profit order is an order which allows you to close a position in order to take profit from your trade, once the last market price reaches your profit price. This order can be used to close a position or to enter a new position. As presently described, we directly find a similarity with a limit order. The trader fixes the profit price at which their order will be placed (limit price in the case of a limit order). The difference with the limit order concerns the fee incurred. The limit order when well placed incurs a maker fee, while the take profit order incurs a taker fee😲. Yes, remember that once the last market order reaches your profit price, the order is immediately executed at the best available market price, hence, incurring a taker fee like a market order 😎. As an illustration, let's assume you have a long (buy) position, which basically means that you expect the asset price to increase so that when closing your position at the correct time, you get some profits in the best situation. We all know that human beings in general and traders, in particular, want to always win more. But due to the volatile and unpredictable character of the crypto price, the wise trader needs to secure their position, hence, placing a take-profit order. So, the trader opens their long position at a defined crypto price at let's say USD 2000 (the initial price of the crypto), and the price increases and goes above USD 2100 at a given time. The trader has noticed it but is insured since it does not know when the crypto price will fall or will keep increasing. So to secure their current profit, they decide to place a take profit order with a defined profit price equal to USD 2080 (which is in the current example a sell order when the last market price will reach the profit price). Thus, placing the take-profit order guarantees that the trader will close their position with a profit. The profit basically in this example will be the final cost (cost at which they closed the position) minus the initial cost (cost at which they opened the position) minus the trading fees (sum of fees charged when opening and closing the position in addition to the fee incurred to maintain their position opened ).
What is a stop-loss order?
As it is named, the stop-loss is an order which allows you to limitate in most cases your losses. Like in the case of a take profit and for the same reasons mentioned above, this order incurs a taker fee. The order is placed or triggered when the last market price reaches a specific price known as the stop price. As an illustration, a trader opens their long position at a defined crypto price at let's say USD 2000 (the initial price of the crypto), and the price increases and goes above USD 2100 at a given time. They are convinced that the price will increase and they will be able to notice when it will start falling. Let's say for a lack of attention, the crypto price starts falling below USD 2000, let's say the crypto price is now USD 1990 (we know it is a huge loss 😂😂😂). They panic and want to save their funds, but they are still optimist (thinking that the price will increase again above the initial price), so they decide to place a sell stop-loss order with a stop price equal to USD 1950 (obviously, this is a sell order when the last market price reaches the stop price). Thus, placing a stop-loss order allows the trader to limit their losses in this example. Let's mention that the stop-loss can also be used to lock the trader's profits.
Some cryptocurrency exchange platforms provide a description of these orders according to their platform. This is the case of Binance, Kraken, Coinbase....
How to choose your profit and loss prices?
- Buy take-profit: Profit price is chosen below the market price.
- Sell take-profit: Profit price is chosen above the market price.
- Buy stop-loss: Loss price is chosen above the market price
- Sell stop-loss: Loss price is chosen below the market price
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