A take-profit order is an act of selling cryptocurrency to secure profits. It is usually executed at a predetermined price when the trade is in profit.
In our example, they may set a stop-loss order at $0.8. That would give the trader a 1:2 risk-reward ratio. In other words, they would have to close this trade profitably more often than one in three times to make a profit.
The biggest benefit is probably locking in profits, which allows traders to multiply their earnings quite quickly. Since cryptocurrencies can swing in their valuation, it is not uncommon for traders to get a trade right and not take profits in the hope of the price further appreciating. Unfortunately, all too often, the price reverses, and the trader does not make the anticipated profit because of their own greed. Take-profit orders take the decision away from traders and help them stay the course.
Another benefit is climbing up the learning curve by using advanced orders like taking profit. Traders that learn to manage their trades according to predetermined profit targets are generally already quite advanced and understand the concept of managing risk. Thus, taking profit helps traders improve their skills.
First and foremost, taking profits is difficult. Traders need a good understanding of market conditions to set a realistic price target. This is an advanced skill that beginner traders do not have. Taking profits has to be learned, and the experience to set good price targets that result in a profitable trading strategy is not developed overnight.
Second, taking profits can be emotionally challenging if a trade has gone well. All too often, traders are tempted to let a trade run to squeeze out more profits. Also, taking profits can cap a trader's upside and deprive them of even bigger gains if the token appreciates more than expected. That is why experienced traders set several take-profit targets. That way they can benefit from an unexpected token run.
There are a couple of factors traders have to be aware of when it comes to the execution of take-profit orders.
Next, traders need to stay on top of the news cycle to realize when fundamentals are changing. For instance, a token may release a piece of crucial information, such as a change in the team. This information has to be incorporated into the trading analysis and the order may have to be changed accordingly.
Traders also need to be aware of macroeconomic conditions that can influence their trades. Especially news not related to the cryptocurrency markets can have ripple effects and influence token prices.
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