EUGENE GOLDFIELD

Exit Strategy: When to Stop Loss & Take Profit

First, there are two concepts worth noting, namely the profit or loss ratio and the win rate. A profit or loss ratio is calculated as the average profit divided by the average loss. For instance, if the average profit and average loss generated from 10 transactions are 20,000 dollars and 10,000 dollars respectively, the profit or loss ratio is 2:1. A win rate is calculated as the total number of winning trades divided by the total number of trades. For instance, if the total numbers of trades and winning trades are 10 and 6 respectively, the win rate is 60%.

Both the profit or loss ratio and win rate are the concepts on which professional traders put great emphasis. During trading, reasonably predefining the profit or loss ratio and win rate makes stable profits achievable. As the figure below shows, the profit or loss ratio and the win rate have an inverse relationship in employing the same strategy to execute trades for many times. If a trader seeks to maintain a profit margin, he needs to achieve a higher win rate and a lower profit or loss ratio. As such, a win rate of 1:1 applies to a high-frequency trade with a better prospect of profit; while reaching a win rate of below 50% is commonplace in employing a mid-to-long-term strategy with a higher profit or loss ratio.

Both the profit or loss ratio and win rate are the concepts on which professional traders put great emphasis. During trading, reasonably predefining the profit or loss ratio and win rate makes stable profits achievable. As the figure below shows, the profit or loss ratio and the win rate have an inverse relationship in employing the same strategy to execute trades for many times. If a trader seeks to maintain a profit margin, he needs to achieve a higher win rate and a lower profit or loss ratio. As such, a win rate of 1:1 applies to a high-frequency trade with a better prospect of profit; while reaching a win rate of below 50% is commonplace in employing a mid-to-long-term strategy with a higher profit or loss ratio.

Therefore, before a position is opened, traders are required to pre-set take profit lines and stop loss lines reasonably. In the meantime, they should also need to reasonably control the profit or loss ratios according to their trading strategies and experience. While the market price falls to a stop loss line, one should strictly implement his original strategy and examine the reasons for the loss during review. The loss accumulated before the market price drops to the predefined stop loss line is totally acceptable. As a result, although his total assets fall in a short term, it is expected that they will rise if the win rate and profit or loss ratio are reasonable. Many fresh investors always do not plan reasonable stop loss strategies in advance and even buy more positions against the market trends, resulting in huge and unrecoverable losses.

For example, while BTC's price falls within the Bollinger Band, the daily support line is at 9500USD. When there is an uptrend, long orders are placed at 9700USD after predefining the stop loss line and take profit line at 9400USD (-300USD) and 10300USD (+600USD) to meet a profit or loss ratio of 2:1. Long term use of such strategy and other indices to maintain a profit or loss ratio of 2:1 is likely to increase the win rate and the prospect of profit.

For example, while BTC's price falls within the Bollinger Band, the daily support line is at 9500USD. When there is an uptrend, long orders are placed at 9700USD after predefining the stop loss line and take profit line at 9400USD (-300USD) and 10300USD (+600USD) to meet a profit or loss ratio of 2:1. Long term use of such strategy and other indices to maintain a profit or loss ratio of 2:1 is likely to increase the win rate and the prospect of profit.

As the crypto market operates on a 24*7 basis, huge fluctuations usually happen during their non-trading hours. Using the strategic order placing function can, to a certain extent, make orders placed more readily. Also, closing offset order types include take profit and stop loss orders (buy or sell positions once they reach a certain price), iceberg orders (large orders divided into smaller ones), and time-weighted average price (TWAP) orders (place orders at regular intervals).

In summary, we should develop a trading strategy to pre-set a take profit line and a stop loss line and to maintain a profit or loss ratio of above 1 before executing each trade. We should also continuously increase the win rates and ensure prompt placing of orders to achieve stabler profits by virtue of other indices and tools.

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