Take Profit (TP) and Stop Loss (SL) are foundational risk management tools for traders. A TP order allows you to secure profits automatically, which is particularly useful in volatile markets. Conversely, an SL order helps you limit potential losses by closing a position when the price moves against you.
Key Differences Between TP/SL, OCO, and Conditional Orders
TP/SL orders share similarities with conditional orders but have distinct operational characteristics, primarily concerning how assets are utilized when the order is placed.
| Order Type | Asset Usage Upon Placement |
|---|---|
| TP/SL Order | Assets are reserved and used immediately when the TP/SL order is placed, before it is triggered. |
| OCO Order (One-Cancels-the-Other) | Due to the nature of OCO orders, only the margin for one side of the order is used upon placement. |
| Conditional Order | Assets are not used when the order is placed. The necessary assets are only reserved after the conditional order is triggered by the underlying asset's price. |
How TP/SL Orders Work in Spot Trading
There are two primary methods for using TP/SL orders in spot markets.
Placing a TP/SL Order Directly from the Order Zone
This method involves setting a trigger price, an order price (for limit orders), and the order quantity. Your assets are reserved the moment you place the TP/SL order. When the last traded price reaches your pre-set trigger price, a limit or market order is placed according to your specified parameters.
- A Market Order will be executed immediately at the best available market price.
- A Limit Order will be placed into the order book and wait to be filled at the specified order price. If the best bid/ask price is better than your limit price, the order may be filled instantly at that better price. Traders should be cautious as the execution of a limit order is not guaranteed and depends on price volatility and order book liquidity.
Practical Examples
Assume the current price of BTC is 20,000 USDT.
| Scenario | Outcome |
|---|---|
| Sell (Market) TP/SL Order Trigger Price: 19,000 USDT Order Price: Not Applicable | When the last traded price hits the TP/SL trigger of 19,000 USDT, the order is activated. A sell market order is placed immediately, selling the asset at the best available market price. |
| Buy (Limit) TP/SL Order Trigger Price: 21,000 USDT Order Price: 20,000 USDT | When the last traded price reaches the TP/SL trigger of 21,000 USDT, the order activates. A buy limit order with a price of 20,000 USDT is placed into the order book, waiting to be filled. It will execute when the price reaches 20,000 USDT. |
| Sell (Limit) TP/SL Order Trigger Price: 21,000 USDT Order Price: 21,000 USDT | When the trigger price of 21,000 USDT is hit, the TP/SL order is activated. If the best bid price is 21,050 USDT at that moment, the sell limit order will be filled instantly at this better (higher) price of 21,050 USDT. However, if the price drops below the order price upon activation, the sell limit order for 21,000 USDT will be placed in the order book to await execution. |
Placing a Limit Order with Pre-Set TP/SL Orders (For UTA Only)
This advanced strategy allows traders to attach a set of TP or SL orders directly to a new limit order. Once the initial limit order is filled, the attached TP and SL orders are automatically placed based on your pre-configured prices and quantities.
This approach follows a logic similar to OCO orders, where only one side of the order margin is used. You can set both TP and SL orders as either market or limit orders. The activation of one order will automatically cancel the other. It's crucial to understand that the corresponding TP/SL order is canceled the moment the other is triggered, even if the triggered limit order hasn't been filled yet. In certain market conditions, this could mean your limit order doesn't get filled while the opposite protective order has already been canceled.
👉 Explore more strategies for advanced order types
Practical Example
Trader A places a buy limit order for BTC at 40,000 USDT and pre-sets the following TP/SL parameters:
- Limit Order Price: 40,000 USDT
- Order Quantity: 1 BTC
- Take Profit Limit Order: Trigger at 50,000 USDT, sell at 50,500 USDT
- Stop Loss Market Order: Trigger at 30,000 USDT
Once the BTC price hits 40,000 USDT and the buy limit order is filled, the TP/SL orders are automatically placed.
Scenario 1: The price rises to 50,000 USDT. The TP order is triggered, and a sell limit order at 50,500 USDT is placed into the order book. The SL order is automatically canceled.
Scenario 2: The price falls to 30,000 USDT. The SL order is triggered, and a sell market order is placed, immediately selling 1 BTC at the best available market price. The TP order is automatically canceled.
Important Notes on Pre-Set TP/SL
- The pre-set TP/SL feature for limit orders is exclusively available to Unified Trading Account (UTA) users.
- For a sell TP/SL attached to a buy limit order, the TP trigger price must be higher than your limit order price, while the SL trigger price must be lower.
- For a buy TP/SL attached to a sell limit order, the TP trigger price must be lower than your limit order price, while the SL trigger price must be higher.
- The order price for TP and SL must adhere to the contract's price limit rules relative to the trigger price. For instance, with a 3% price limit for BTC/USDT, a buy TP/SL order price cannot exceed 103% of the trigger price, and a sell TP/SL order price cannot be below 97% of the trigger price.
- If the order quantity or value does not meet the minimum order requirement after the initial limit order is filled, your TP/SL order may not be placed or executed when triggered.
Frequently Asked Questions (FAQ)
What is the main purpose of a Stop Loss (SL) order?
The primary purpose of a stop loss order is to manage risk and protect your capital. It automatically closes your position at a predetermined price point to prevent further losses if the market moves against your prediction. This is crucial for maintaining discipline and preventing emotional decision-making during volatile price swings.
How does a Take Profit (TP) order differ from simply selling manually?
A take profit order automates the process of securing gains. Instead of constantly monitoring the markets, you set a target price where you want to exit with a profit. Once the asset reaches that price, the order executes automatically, ensuring you lock in your profits and avoid the temptation to become greedy and hold for an even higher, but riskier, price.
Can I modify or cancel a TP/SL order after I place it?
Yes, in most trading interfaces, you can typically modify the trigger price, order price, or quantity of an active TP/SL order before it is triggered. You can also cancel it entirely if your market outlook or strategy changes. It's important to check your platform's specific functionality for managing open orders.
What happens if the market gaps past my Stop Loss trigger price?
If the market price moves very rapidly, skipping past your stop loss trigger price (a phenomenon called "gapping"), your stop loss market order will execute at the next available best market price, which could be significantly worse than your trigger price. This is a risk inherent to all market orders during periods of extreme volatility or low liquidity.
Is it better to use a stop loss market order or a stop loss limit order?
A stop loss market order guarantees execution but not price, which is vital for ensuring you exit a losing trade quickly. A stop loss limit order guarantees price but not execution; if the price gaps below your limit price, your order may not fill, leaving you exposed to further losses. For strict risk management, a market order is often preferred for stop losses.
Why are my assets reserved when I place a TP/SL order on some platforms?
Platforms reserve the necessary assets when you place a TP/SL order to guarantee that the order can be executed immediately and successfully once the trigger conditions are met. This prevents you from selling assets you no longer own and ensures the integrity of the order book.