How to set stop loss and take profit on binance futures

Main Takeaway:

  • Risk management techniques such as setting up take-profit and stop-loss orders can help protect your trading account from outsized losses.

  • Binance Futures enables users to set TP/SL orders simultaneously to help them better assess their risk-to-reward ratio.

  • Some of the most successful traders believe that stop-loss orders can be considered a free insurance policy.

Cryptocurrencies offer unique opportunities for traders to profit because of their high volatility. But without proper risk management, any winning trade can turn into a losing trade really fast. This is why you should have a solid trading plan to avoid making emotional decisions. 

Binance Futures encourages users to protect their capital by trading responsibly in the volatile cryptocurrency markets. Self-discipline is one of the most critical traits traders need to develop to avoid compulsive trading or gambling. If you ever find yourself in a losing streak, you can enable the Cooling-Off Period function on Binance Futures, which disables trading for an extended period. 

But what would help you the most to prevent such unfortunate events is learning how to identify when is the right time to enter and exit a trade and when to abandon a losing trade. By cutting your losses short, you can protect your trading account from outsized losses. 

You can mitigate risks and keep your emotions in check by simply setting up take-profit (TP) and stop-loss (SL) orders. This way, you are more likely to lower the stress throughout your trading journey and insulate your decision-making from emotional influences. 

Take-Profit and Stop-Loss Orders

Take-profit and stop-loss orders can be considered part of your exit strategy for each trade you make. These orders are executed once prices reach a predetermined level, closing your long or short position for a gain or a loss. 

Your trading preferences play a significant role in determining where your take-profit and stop-loss orders are placed. Whether you prefer to trade candlestick patterns, chart patterns, trendlines, or technical indicators, with TP/SL orders, you won’t have to worry about exiting a trade or second-guessing your decisions.

For instance, a trader who enters a long position based on an ascending triangle can quickly determine where to place the take-profit and stop-loss orders. The height of the triangle’s Y-axis can yield a potential target, while the pattern’s hypotenuse suggests an invalidation point.  

Be aware that each trade you enter requires an exit point because no one knows what will happen in the cryptocurrency markets on any given day. Therefore, take-profit and stop-loss orders help protect you from the unknown and better understand what to expect from each position you open. 

Benefits of Take-Profit and Stop-Loss Orders

Although take-profit and stop-loss orders are used to close a position, they are entirely opposite of each other. Take-profit orders are executed to close your position for expected gains. Meanwhile, stop-loss orders are executed to close your position for expected losses. 

Remember that you should calculate the risk-to-reward ratio of each trade setup you identify to evaluate whether it’s worth entering a position. Ideally, you want to determine how much risk you are taking for potentially how much reward. 

For instance, a trade setup with a profit target of 15% and an invalidation point of 5% has a risk-to-reward ratio of 1:3 or 0.33. This means that for each unit of risk, there is three times the potential reward. 

Binance Futures makes these calculations easier with its Advanced TP/SL function. It allows traders to set the take-profit and stop-loss orders by entering the percentage gain or loss expected. Advanced TP/SL also helps set up take-profit and stop-loss orders based on the last price or mark price and displays the estimated profit and loss for take-profit and stop-loss orders.

Take-profit and stop-loss orders represent one of the best ways to mitigate risk. A take-profit order helps you lock profits when you have accurately anticipated a market movement. On the other hand, stop-loss orders help you cut losses when the market moves against your positions. Consequently, acting as a free insurance policy for your trading account. 

You can also have the flexibility to engage in other activities while having an open position because the take-profit and stop-loss orders will be automatically executed when the time is right. 

How to Place Take-Profit and Stop-Loss Orders

Before you set up take-profit and stop-loss orders, you should first identify a trade setup, assess the triggers, and determine your position size. 

Some traders may prefer to trade based on candlestick patterns, chart patterns, trendlines, or technical indicators. Regardless, you should have a technical reason why you want to enter a trade and a trigger that will tell you when is the best time to enter the trade. With this information, you can then determine what percentage of your available capital you’re willing to risk on a single trade. 

On the Binance App, it’s very easy to set up take-profit and stop-loss orders while entering a position. Go to [Futures] and check the box next to [TP/SL], which will enable you to input the [Take Profit] price and the [Stop Loss] price. You can also click [Advanced] to have more precise control over the execution price. 

For more information on setting up take-profit and stop-loss orders from the web application, please visit What Are Limit TP/SL Orders and Frequently Asked Questions. 

Put Your Knowledge Into Practice!

When trading futures, traders need to manage risks properly to stay consistent in maximizing returns. A robust risk management strategy can also help to reduce potential losses, mainly because the cryptocurrency market is highly volatile.

Binance Futures encourages users to practice trading responsibly by having a proper trading plan. Take-profit and stop-loss orders can lower stress and protect your investment capital.

Feel free to practice trading in real-time with zero risks in Binace Futures’ Mock Trading. This simulation trading platform allows you to use testnet funds to experiment with different risk levels to sharpen your trading skills. Once you clearly understand how to set up take-profit and stop-loss orders, you can switch back to trade live on Binance Futures.  

Read the following helpful articles for more information about Binance Futures:

Risk warning: Cryptocurrency trading is subject to high market risk and price volatility. You should only trade or invest in products that you are familiar with and understand the risks associated with them. You should carefully consider your investment experience, financial situation, investment objective, risk tolerance level and consult your independent financial adviser as to the suitability of your situation prior to making any investment or trades. The material on this site is provided for information purposes only and should not be construed as financial advice. Past performance is not a reliable indicator of future performance. You should note that the value of an investment and any returns can go down as well as up, and you may not get back the amount you had invested. You are solely responsible for the trading or investment decisions that you have made. Binance is not responsible for any trading losses that you may incur. Further details can be found in our terms of use.

TL;DR

Stop-loss and take-profit levels are two fundamental concepts that many traders rely on to determine their trade exit strategies depending on how much risk they are willing to take. These thresholds are used in both traditional and crypto markets, and are especially popular among traders whose preferred approach is technical analysis.

Introduction

Timing the market is a strategy where investors and traders try to predict future market prices and find an optimal price level to buy or sell assets. Under this approach, figuring out when to exit the market is vital. That’s where stop-loss and take-profit levels come into play. 

Stop-loss and take-profit levels are price targets that traders set for themselves in advance. Often used as part of a disciplined trader’s exit strategy, these predetermined levels are designed to keep emotional trading to a minimum and are essential to risk management.

Stop-loss and take-profit levels

A stop-loss (SL) level is the predetermined price of an asset, set below the current price, at which the position gets closed in order to limit an investor’s loss on this position. Conversely, a take-profit (TP) level is a preset price at which traders close a profitable position.

Instead of using market orders in real-time, traders can set these levels to trigger automatic selling without having to monitor the markets 24/7. Binance Futures, for example, has a Stop Order function that combines stop-loss and take-profit orders. The system decides if an order is stop-loss or take-profit based on trigger price levels and last price or mark price when the order is placed. 

Why use stop-loss and take-profit levels?

Exercise risk management

SL and TP levels reflect the market’s current dynamics, and those who know how to properly identify their optimal values are essentially identifying favorable trading opportunities and acceptable levels of risk. Evaluating risk using SL and TP levels can play a crucial role in preserving and growing your portfolio. Not only are you systematically protecting your holdings by prioritizing less risky trades, but you are also preventing your portfolio from being wiped out completely. Therefore, many traders use SL and TP levels in their risk management strategies.

Prevent emotional trading

One’s emotional state at any given moment can heavily affect decision-making, and this is why some traders rely on a preset strategy to avoid trading under stress, fear, greed, or other powerful emotions. Learning to identify when to close a position can help you avoid trading on impulse, allowing you to manage your trades strategically rather than whimsically.  

Calculate risk-to-reward ratio

Stop-loss and take-profit levels are used to calculate a trade’s risk-to-reward ratio.

Risk-to-reward is the measure of risk taken in exchange for potential rewards. Generally, it is better to enter trades that have a lower risk-to-reward ratio as it means that your potential profits outweigh potential risks. 

You can calculate risk-to-reward ratio with this formula:

Risk-to-reward ratio = (Entry price – Stop-loss price) / (Take-profit price – entry price)

How to calculate stop-loss and take-profit levels

There are various methods that traders can utilize to determine optimal stop-loss and take-profit levels. These approaches may be used independently or in combination with other methods, but the end goal is still the same: to use existing data to make more informed decisions about when to close a position.

Support and resistance levels

Support and resistance are core concepts familiar to any technical trader in both traditional and crypto markets. 

Support and resistance levels are areas on a price chart that are more likely to experience increased trading activity, be it buying or selling. At support levels, downtrends are expected to pause due to increased levels of buying activity. At resistance levels, uptrends are expected to pause due to increased levels of selling activity.

Traders who use this method typically set their take-profit level just above the support level and stop-loss level right below the resistance level they have identified.

Here’s a detailed explanation of The Basics of Support and Resistance.

Moving Averages

This technical indicator filters market noise and smooths price action data out to present the direction of a trend. 

Moving averages (MA) can be calculated over a shorter or longer period, depending on individual traders’ preferences. Traders monitor moving averages closely, looking out for opportunities to sell or buy presented in crossover signals, where two different MAs cross on a chart. You can read about Moving Averages in detail.

Typically, traders using MA identify stop-loss levels below a longer-term moving average. 

Percentage method

Instead of a pre-specified level calculated using technical indicators, some traders use a fixed percentage to determine SL and TP levels. For instance, they may choose to close their position once an asset’s price is 5% above or below the price they entered. This is a straightforward approach that works well  for traders who are not very familiar with technical indicators.

Other indicators

We’ve mentioned a few common TA tools used to establish SL and TP levels, but traders use many other indicators. This includes Relative Strength Index (RSI), which is a momentum indicator that signals if an asset is overbought or oversold, Bollinger Bands (BB), which measures market volatility, and Moving Average Convergence Divergence (MACD), which uses exponential moving averages as data points.

Closing thoughts

Many traders and investors use one or a combination of the approaches above to calculate stop-loss and take-profit levels. These levels serve as technical motivations for them to exit a trade, be it to abandon a losing position or realize potential profits. Note that these levels are unique to each trader and do not guarantee successful performance.  Instead, they guide decision-making, making it more systematic and robust. Thus, evaluating risk by identifying stop-loss and take-profit levels or using other risk management strategies is a good trading habit.

Written by Jane