Cryptocurrencies

Stop-loss and take-profit, Miracle Tools or Deadly Traps? – Cryptocurrencies

Last week, we saw together the main technical indicators useful for crypto and Bitcoin trading. Today we’re going to talk about a topic that can divide the community: the use of stop-losses and take-profits in your trading system! If one thing is certain, it is that not knowing what it is is a mistake. You absolutely must understand the ins and outs behind these two tools in order to make an informed choice whether or not to use them. Come on, make yourself comfortable, with a little Lisa Simpson (fresh cocktail made from coca and grenadine), and off you go!

Preamble

If you are interested in bitcoin and cryptocurrency trading (and I assume that if you are here it is yes), then the notions of stop-loss and of take-profit must not be unknown to you. At least by name.

Questions can then arise:

  • What does a stop-loss really mean? A take-profit?
  • How to optimize the use of these?
  • Are they useful? Should we use them in all situations?

So many questions that we will try to answer in this article!

In trading, and I will keep telling you, your biggest enemy it’s the risk. It is he who can make you lose 3 weeks of gains in just a few hours on a bad trade. It is also he who will push you to vice and make you want to try the impossible.

You know the myth of Icarus ? Here is a quick summary.

Icarus is a talented Greek engineer. With his knowledge, he succeeded in making wings and flying in the sky. Exhilarated by the feeling that the flight gives him, he forgets his father’s recommendations: never get too close to the sun. And what had to happen happened. It flew too high and burned its wings, dying after falling into the sea, the sea today bearing its name: the Icarian Sea. This myth also gave name to a famous expression: to burn one’s wings.

The myth of Icarus, a representation of cryptocurrency and Bitcoin traders who can burn their wings

When we start trading, theexcitation is one of the first feelings we feel. And I am the first witness. In short, know that at one point, on my own, I cut all ties to trading. Why ? Because trading had made me snag at this feeling of enjoyment that I felt when I saw my capital increase …

And I felt that this thrill felt me ​​more and more to take risks, and eventually burn the wings.

Trading is a marathon. Not a sprint. Knowing how to protect and manage your capital are compulsory skills.

And just like you won’t run a marathon without good shoes and equipment, you don’t trade without the right tools.

The stop-loss and the take-profits can be good tools. Double-edged tools to be exact.

Definition

Stop-loss

The literal translation of the term stop-loss is sufficiently clear:

  • Stop is translated by “stop
  • Loss is translated by “loss

A stop-loss therefore serves to stop losses. It is nothing more than an order that you place on your preferred trading platform, on which you indicate the maximum loss that you accept.

Let’s take an example, it will be much clearer as well.

Technical analysis by Cryptodidacte on BNB, Binance's cryptocurrency

This graphical analysis was carried out for the purposes of this article but does not in any way represent a real trading context.

The green rectangle represents an area of ​​interest which could serve as support at the current price. The red rectangle is another area of ​​interest which could be used this time resistance.

From there, a trader might want to try their luck and buy now in order to resell in the red rectangle serving as resistance.

The question now is “When is this trade no longer valid? “. And the answer, here, could be: “If the price breaks the support from below, if it crosses the green rectangle from below”.

It would therefore be potentially interesting to position a stop-loss under this rectangle. This is what the red area symbolizes on the graph. If the price drops to the end of this area, then the platform will automatically sell your position.

Interest? If ever the price drops while you are away for example, the platform will sell with few losses, even though during your absence the price could go down a lot more. The stop-loss stops the losses.

Take-profit

Just like the stop-loss, the translation of take-profit is easily understood:

  • Take is translated by “to take
  • Profit is translated by… “profit“(Yes, yes, I know it’s phew!)

A take-profit is therefore an order that you will give on your trading platform in order to automatically take your profits.

Let’s take the previous example.

Technical analysis by Cryptodidacte on BNB, Binance's cryptocurrency

In this context, the objective is to buy at the current price, and to resell once the price arrives in the red rectangle, the resistance.

It would therefore be possible to put a take profit at the end of the green zone. The platform would then automatically sell the position at that price, without you having to manage anything!

The advantage is that you are guaranteed to have your profits if the price goes up, even during your sleep for example! The downside is that if it goes up more, you will miss.

Stop-losses and take-profits in trading

So I explained to you that stop-losses and take-profits allowed to manage your trades automatically, even when you are asleep or just out of your PC.

So it’s too good isn’t it? Who wants to do without tools that allow them to be more efficient, limit risks and be able to take breaks easily ?!

Have you ever heard of market makers ?

Basics of Market Maker and Order Book

Let’s start with the beginning. What is a market maker ? Quite simply, it is a person who manages a capital with much more zero than you above … To a point where he must think about how to get in and out of a position, at the risk of having a real and immediate impact on prices. If you wish, you can associate this with a whale.

But a whale who has made trading her job and market management her specialty.

A whale, also called whale in the cryptocurrency and Bitcoin ecosystem

The market makers aim to make money on your back. As the saying goes: trading is about take money from the impatient for the put in the hand of others.

And how can they do it? Thanks to a tool that exists on all trading platforms: the order book, or order book in English !

Binance platform order book for the Bitcoin trading pair against Tether
Extract from an order book on Binance

This order book is the representation of all orders issued by all traders on the platform. Thus, by reading this order book, it is easy to see which areas of interest to come for the price.

However, one thing that few know is that your stop-loss and take-profits are also orders… and as such, they are also condensed in an order book. Except this one is private.

And there are less scrupulous platforms than others that resell these order books to market makers !

The danger is that by knowing where the stop-losses (or take-profits) are positioned, the market makers play in causing the price to fluctuate to their advantage.

Example, if Bitcoin is at $ 10,000 and many people have put a stop-loss (therefore an automatic sale) at $ 9800, market makers will have an interest in dropping the price to $ 9800. Why ?

Because it would cause a wave of bitcoin sales, which they would hasten to buy back, and then the price could quietly go up to $ 10,000.

At the end of the operation, hundreds or even thousands of amateur traders have lost some bitcoins, and a big one market maker in recovered much more.

Repeat this operation over and over again, until the little ones are completely washed out … the danger of this game which can be biased because of’asymmetric information.

For more details on this principle of market makers and order books that help them, Maxime Prigent wrote an excellent article on the subject: “Stop orders”, or how the Market Maker makes a living on your back!

Use of stop-loss and take-profit orders

The stop-loss, just like the take-profits, are, as we have seen, very powerful tools to assist you in your trading.

In particular, they make sense absent from you. They prevent the trade from getting out of control while you were just sleeping.

This is a peculiarity specific to cryptocurrencies and Bitcoin: it is possible to trade this market 24 hours a day. You must therefore warn yourself of any movement at night …

Nevertheless, place a stop-loss or one take-profitis also to show up naked, in front of market makers, and tell them “This is where my personal limit is! “. So you have to do it cleverly.

Already, if you are comfortable enough for the manage manually, do it. The stop-loss and the take-profits are useful to reassure you, to avoid stupidity.

But the more you advance in your trading learning, the more you will be able to avoid nonsense on your own, without having to resort to external tools.

In any case, if you ever use stop-losses or take-profits to secure your trades, try to place them a little “wide”. Cryptocurrencies and Bitcoin are highly volatile markets. And who says high volatilitysays wide limit orders.

Conclusion

This ninth Trading Tribune ends here! I hope you have always liked it. Stop-loss and take-profit are particularly powerful tools that every trader must master. However, to master a tool, you must also know its disadvantages. These are all too often overlooked.

An interesting thing if you want to try to trade with and without limit orders, it would be to very clearly note the period with the period without in your trading log. So, after several weeks or even months of results, you could see under what conditions you are performing best. And thus determine if the use of these tools is interesting or not, in your case!

For the tenth chapter, we will discuss portfolio management! An essential notion in order to properly manage your capital, your assets, and thus maximize your gain while limiting your risk.

In any case, I hope you enjoy reading all of this, and that you will follow this Tribune carefully to the end!

See you next week !

Previous chapters of the Trading Grandstand:

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