What is Take-Profit and Stop-Loss: A Complete Guide to Risk Management in Spot Trading

Take-profit is a tool that helps traders automatically lock in profits when the desired price is reached. Stop-loss works in the opposite way — it limits losses by automatically selling the asset if the price drops below the set level. Together, these two orders form a risk management system that is essential for maintaining long-term profitability. In volatile cryptocurrency markets, proper handling of TP/SL determines whether a trader makes a profit or loses their deposit.

How TP/SL differs from conditional orders and OCO

Many beginner traders confuse these three types of orders, although they operate differently. The main difference lies in how assets are reserved.

When you place a TP/SL order, assets are immediately blocked, even if the trigger price has not yet been reached. This means funds are reserved and cannot be used for other trades.

OCO order (One-Cancels-the-Other) is more advantageous: it uses only one side of margin. If one order (TP or SL) is triggered, the other is automatically canceled. This conserves margin space for other operations.

Conditional order does not reserve assets until triggered. Funds remain freely available until the asset’s price reaches the trigger price. Only then are assets blocked, and the order enters the order book.

How TP/SL practically work on spot trading: real examples

Imagine Bitcoin is trading at 20,000 USDT. You want to set protection on both sides. Here’s how it might look:

Market order TP/SL for selling

You set:

• Trigger price: 19,000 USDT
• Order price: not required (this is a market order)

When the last trade price drops to 19,000 USDT, the trigger activates. Your assets are immediately sold at the best available price at that moment. Market orders are executed on an IOC (Immediate-Or-Cancel) basis — any portion that cannot be filled immediately is canceled. This is fast, but you might get a worse price in low liquidity conditions.

Limit order TP/SL for buying

Parameters:

• Trigger price: 21,000 USDT
• Order price: 20,000 USDT

When the price hits 21,000 USDT, the order triggers and your limit buy order is placed in the order book at 20,000 USDT. It will wait there until the price drops and the order is filled. If the price never returns, your purchase does not happen.

Limit order TP/SL for selling at the best price

Parameters:

• Trigger price: 21,000 USDT
• Order price: 21,000 USDT

When the price reaches 21,000 USDT, the trigger activates. If at that moment the best bid in the order book is 21,050 USDT (above your order price), the order will be executed immediately at the best price — 21,050 USDT. But if the bid is below 21,000 USDT, your order will join the queue at 21,000 USDT.

Two ways to place orders: separately or together

Traders often ask: should TP/SL be placed as separate orders or linked to the main position?

Method 1: Separate placement provides flexibility. You place TP and SL as independent orders, which can be modified at any time. The downside — assets are blocked immediately upon placement.

Method 2: Pre-placing — when you place a limit buy order and immediately attach TP and SL with the desired parameters. Once the main limit order is executed, TP/SL orders are automatically activated. This is similar to OCO logic but works in two steps.

Example of pre-placing

You plan to buy Bitcoin at 40,000 USDT per coin. You pre-set:

1. Limit buy order: 40,000 USDT, 1 BTC
2. Limit take-profit: trigger at 50,000 USDT, sell price 50,500 USDT
3. Market stop-loss: trigger at 30,000 USDT

Scenario 1 — price rises to 50,000 USDT: TP triggers. Your sell order at 50,500 USDT enters the order book. SL is automatically canceled. You now sell at 50,500 USDT per Bitcoin instead of 50,000 USDT — capturing the spread profit.

Scenario 2 — price drops to 30,000 USDT: SL triggers. Your Bitcoin is immediately sold at the best available price. TP order is canceled. Loss is limited.

Important limitations and risks to remember

Limit orders do not guarantee execution. If you set a TP with a limit price and the market falls too quickly past that price without enough volume, your order simply won’t fill. The price drops, profit evaporates, but the order remains in the book.

When placing pre-set TP/SL with a limit order, remember: once the main limit order executes, the SL order is canceled. If the price bounces back and does not reach your limit TP price, that order remains unfilled, and protection is already gone.

Technical volume restrictions:

• The maximum size of a spot limit order can be larger than a market order
• If you place a limit order for 1 BTC with a market TP/SL, but the maximum market order size is 0.5 BTC, the system will reject the entire placement
• After the main order executes, the size of TP/SL must meet the minimum volume; otherwise, the order cannot be placed

Price spread restrictions: Each trading pair has a price deviation limit — usually 3% for liquid pairs like BTC/USDT. If you set a TP above this limit, the system simply won’t allow it.

The main rule for spot trading

Take-profit is not a luxury but a necessity. Remember: even professional traders do not catch 100% of the price movement. They are professionals because they capture 70-80% and exit with protection. Stop-loss is a safety cushion that protects your deposit. Use both tools together, and the volatility of the crypto market will become your ally, not your enemy.