The idea of trading is appealing for a wide variety of reasons. There are many profits to be had while trading and it can afford a different level of lifestyle and help you leave behind a legacy as well.
At the same time, while there are legends in the speculation space, you will notice that there are many who are looking to earn, grow, and have enough profits to sustain a living.
Indeed, the truth is that if you are not careful, you can lose your principal. The longer you sustain losses without using the right strategies, the more that your principal declines and you have little to show for your efforts.
That is why many people ensure to learn the basics and various aspects of this activity in various ways before risking large portions of capital. This way, they have more confidence and are certain that they will make more progress.
This is even more important in the digital asset segment. The reason why many people appreciate it is its volatility. Its volatility provides for the ability to earn in many different sub-segments and token markets.
This presents a great deal of opportunity and it is why the digital asset industry has grown quite quickly over time. More people have turned to bots to also supplement their expertise in this area as well.
Indeed, whenever you are looking for an effective way to boost your cryptocurrency trading profits, the method of using crypto trading bots stands out as a viable approach. But once you start using these solutions, the features that they present for profit-making strategies make way for a variety of questions in your mind.
One such question refers to using stop-loss and take-profit (T/P) orders with your cryptocurrency bot. Since these order types can be tricky to use even in conventional trading, utilizing them with a trading bot is enough to make you curious about possible results.
This curiosity is necessary as you approach your speculative efforts to ensure that you are not leaving money on the digital table.
To help you determine the answer and make an informed decision, here’s a quick guide to using stop-loss or take-profit with bot trading.
📉 What is Stop-Loss?
To genuinely understand how to make significant progress in the digital asset sector it is necessary to know the different concepts that are present within it.
Thankfully, when it comes to speculative efforts, you can see that digital assets will have similar principles present in the regular trading market.
In cryptocurrency trading, a stop-loss order refers to an order type where you buy or sell a cryptocurrency once it reaches a specific value. This order gets its name by the mechanism it follows to prevent massive losses during your trading activities.
But it is necessary to break this down further with a concrete example.
For instance, if you purchase a cryptocurrency at $100 but its price starts to fall below that value, there may come a point where you may want to sell the asset completely and cut your losses. The stop-loss order does just that and allows you to have an exit strategy if your chosen cryptocurrency starts to perform poorly in the market.
To explain it further, if the cryptocurrency that you purchased for $100 has its stop-loss order set at $80, your bot will sell that asset the second its price falls below $80. This saves you from experiencing significant losses in case the price keeps dropping constantly. In such cases, you can cut your loss at $80 instead of being left with an asset that is now dropped to $20.
You can see how this tool can be valuable, right?
It can help to protect you in a volatile market where the token is crashing more than you would expect.
Due to this simple yet crucial mechanism, stop-loss is considered one of the most basic yet most fundamental protections for any trader in the cryptocurrency space. Many exchanges started offering this order type a few years ago, and it also became a staple for a variety of cryptocurrency bots. Today, you can see stop-loss orders as a standard offering in many cryptocurrency trading solutions from the get go.
If you have no control over the currencies that your bot is trading, then you should use stop-loss in order not to end up holding the cryptocurrencies that you don’t need. If you are selecting the digital assets yourself and feel ready to hodl those even if the price goes down, then you can launch bots without stop-loss settings.
📈 What is Take-Profit?
A take-profit (T/P) order lets you set a specific value at which to sell your cryptocurrency on the market. When you open this order, your cryptocurrency assets can keep waiting in your wallet until they reach the specified price that you have set during the T/P order. Once this happens, your crypto assets are sold to make you a profit.
Typically, T/P orders are opened by traders immediately after they buy a cryptocurrency with the intention to sell it and make a profit. This approach is different from buying a cryptocurrency to hodl it despite the ups and downs in the market. The main goal of a T/P order is to provide you with immediate profit after noticing a certain raise in your specified cryptocurrency.
For instance, if you purchased a cryptocurrency at $50 apiece and believe it would reach its peak price at $60 before it drops in value again, you can put your take profit as $60. This way, when the asset reaches that price, it gets sold automatically before its price could drop again.
By selling your cryptocurrency as soon as it reaches a certain level, this mechanism ensures that you don’t miss out on profitable opportunities in case the asset’s price drops. Since cryptocurrency is a highly unpredictable market that could go through rapid fluctuations in pricing, the T/P order lets you capitalize on market gains before they disappear as soon as they make their presence known.
Due to this reason, the T/P order approach is highly sought after by those traders who are taking a long position or buying their cryptocurrency with the expectation that it will rise in value. This also especially holds true for day traders, who want to make quick profits as soon as possible without wanting to wait for an extensive timeframe to begin with.
When it comes to using T/P with bot trading, the mechanism works the same way. You can activate it with your trading bot and use it with your trading strategy in order to get the most out of it. For effective results, some traders also use their stop-loss orders with the T/P order strategy. This covers them from both ends and lets them capitalize on potential profits, while also preventing the risks of massive losses.
🤷♂️ When to Use Stop-Loss in Bot Trading?
When you traditionally use stop-loss, it is to stop your purchased assets from dropping past a certain price while being in your custody. This prevents losses for assets whose prices might be taking a trip down south.
But when it comes to bot trading, the approach to use stop-loss works a little differently. Instead of solely helping you in preventing your losses with a specific cryptocurrency, this order can be utilized when you are trying to get rid of random cryptocurrencies that you purchased through a bot trading strategy, but which you don’t need in the long run.
Simply put, you should use stop-loss in bot trading when you don’t have any control over the cryptocurrencies that you are buying during your automated trading activities. This particular phenomenon takes place when you are dealing with automated trading strategies without specifying any cryptocurrencies.
If these cryptocurrencies happen to be digital assets that you don’t want to hodl or keep in your wallet for a long time to come, you can open a stop-loss order and specify the limit at which they should be sold automatically. This allows you to steer clear of many possible losses in the long run.
With that being said, if you are confident in holding the assets that you are trading, you can easily move forward with using your cryptocurrency trading bot without putting a stop-loss order into the mix at first.
🤷♀️ When to Use Take-Profit in Bot Trading?
Usually, you open a take-profit order when you have a cryptocurrency at hand that you are confident will increase in its value. By putting a T/P order in motion, you can ensure that you can benefit from potential profit opportunities that you deem suitable for your investment before these chances disappear.
When it comes to using T/P with your automated trading bot, you are to execute the same type of strategy. This is especially true if you want to make rapid yet profitable trades that follow the approach of day trading. This way, you can capitalize on any market gains that take place in association with your cryptocurrency.
In fact, opening a T/P order can become a must-have strategy in some circumstances. For instance, if you are using the DCA strategy, you may find that the T/P order is a foundational part and essence of this strategy. It is because the DCA strategy is all about taking profit once your cryptocurrency reaches its average price. Due to this reason, it is important that you use T/P order whenever using a bot with the DCA strategy.
On the other hand, the grid strategy may or may not require you to open a T/P order for your cryptocurrency trading. While following this strategy, you should only use T/P in cases where you think that the cryptocurrency you hold will drop in price soon after reaching a certain high. This makes sure that you are not ignoring the benefits of T/P when you can harness them.
✍️ What Points Should You Remember While Using Stop-Loss and Take-Profit?
Whenever you are using stop-loss or take-profit to make your trades, you need to make sure that you are approaching these orders with a careful approach. This also holds true in terms of utilizing them with your automated cryptocurrency trading bots.
These points include but are not limited to the following.
Do a Careful Price Assessment
Make sure that you are using a careful assessment to set the limit of your stop-loss as well as your take-profit order. If you set the limit too low for stop-loss or too high for T/P, you may miss the whole point of safeguarding and enhancing your trading funds, respectively.
Execute These Orders With the Right Strategy
It is crucial that you execute stop-loss and take-profit with the right strategy. Otherwise, you can miss out on the features that they bring to the table, while also being unable to earn a decent profit from your usual strategy. This includes measures such as using stop-loss with cryptocurrencies you don’t want to hold long-term, as well as utilizing T/P with approaches such as the DCA strategy.
Do Frequent Performance Checks
Similar to any other strategy, it is important that you do frequent performance checks to see how your approach with the stop-loss and take-profit orders is coming through. If you face any issues or subpar performance, don’t hesitate to tweak a few things with your trades. This ensures that you are not blindly relying on your trading bots but actively making an effort to improve your profits.
💰 Both Stop-Loss and Take-Profit Are Beneficial for Certain Strategies
At the end of the day, using stop-loss and take-profit orders with automated crypto trading bots is a highly beneficial approach. But in order to get the most out of these measures, you should keep an eye out for the right circumstances to use them. As long as you are mindful of this, you can effectively use both order types to take your trading to the next level.