Stop-loss and take-profit: a complete guide to exiting positions

Any experienced trader will confirm: closing a position correctly is almost the same as opening it correctly. Stop-loss and take-profit are tools without which it is difficult to imagine competent portfolio management in both traditional and cryptocurrency markets.

What is take-profit and stop-loss

Take Profit (TP) is the target price at which a trader closes a profitable position to secure profits. For example, you bought an asset for $100, set the TP at $120 — when the price reaches this level, the position will close automatically.

Stop-loss (SL) is a protective level below the entry price. If the market moves against you and the price falls to the set SL, the position will close, limiting losses. This is necessary to avoid losing the entire deposit on one unsuccessful trade.

Instead of monitoring the chart 24/7 and manually closing positions, traders use automatic orders. Most platforms allow setting both levels simultaneously when opening a position, eliminating the need to make decisions under market pressure.

Why these levels are needed

Portfolio protection and risk management

Stop-loss and take-profit are the foundation of any risk management system. They help the trader:

• Determine the maximum allowable loss per trade
• Avoid total capital loss
• Maintain psychological balance

Instead of relying on luck, professional traders calculate acceptable risk in advance and stick to their strategy, regardless of emotional reactions to price movements.

Avoiding impulsive trading

Fear, greed, panic — these are the emotions that lead newcomers to make fatal mistakes. Pre-set exit levels completely eliminate impulsive decisions. The position will close as planned, not because the trader was scared or too hasty.

Risk to reward ratio calculation

A professional approach implies that the potential profit should be at least 2-3 times greater than the potential loss. The formula is simple:

Ratio = (Entry Price − SL Price) / (TP Price − Entry Price)

If this ratio is less than 1, the trade is unpromising. Good risk management implies that most of your trades are favorable in terms of risk-return strategies.

Methods of Determining Stop-Loss and Take-Profit Levels

Support and resistance levels

This is the first thing beginners study. On the price chart, areas are highlighted where the asset has repeatedly bounced up (support) or retraced down (resistance).

Classic approach:

• The stop-loss is set slightly below the support level.
• Take profit — above the resistance level

This method works well because at these levels, the activity of many market participants is concentrated simultaneously.

Moving Averages

The moving average (MA) is an indicator that smooths out market noise and shows the true direction of the trend. Traders often use two moving averages of different periods: when they cross, it is a signal to change position.

A stop-loss is usually set below the long-term moving average - this ensures that you do not close on minor fluctuations, but stay in the trend.

Procent method

A simple and accessible way for those who are not yet familiar with technical indicators. The trader simply sets a fixed percentage:

• Stop-loss: -3% or -5% from the entry price
• Take profit: +5% or +10% from the entry price

Although the method is primitive, it often works due to its simplicity and psychological clarity.

Other tools

Experienced traders combine several approaches:

• RSI (relative strength index) — shows whether the asset is overbought or oversold.
• Bollinger Bands — reflect volatility; price often reverses at the outer bands.
• MACD — combines several moving averages to identify trend reversals.

The more tools that confirm your stop-loss or take-profit level, the higher the likelihood of its effectiveness.

Results

Properly set stop-loss and take-profit are not a guarantee of profit, but they are the foundation of a system that works consistently and without emotions. Every trader must find their combination of methods: some rely on technical support and resistance, some on indicators, some on simple percentages.

The main thing is not to trade blindly. Setting exit levels before opening a position shows that you take capital management seriously. This is a habit that distinguishes professionals from amateurs.