Stop-loss and take-profit: A complete guide to risk management in derivatives

For active traders in the cryptocurrency derivatives market, risk management is a critically important skill. Two key tools that everyone should know are stop-loss and take-profit orders. These orders help traders automatically lock in profits and protect capital from significant losses, working 24/7 even when you’re away from the screen.

What are stop-loss and take-profit? Basic concepts

Modern derivative trading platforms offer two main types of protective orders:

Take-Profit (TP) — an order that closes your position when a target profit price is reached. When the market price hits the set level, the system automatically executes the order, allowing you to lock in gains and exit the trade without constant monitoring.

Stop-Loss (SL) — a protective mechanism that triggers when a certain loss level is reached. Instead of waiting for the price to fall further, this order executes automatically, minimizing losses by quickly exiting a losing position.

Combining these two tools creates a comprehensive protection system: on one side, you set your desired profit target; on the other, the maximum acceptable loss level. This approach disciplines trading and removes emotional decision-making.

How these orders work: trigger mechanism

The operation of take-profit and stop-loss orders is based on trigger systems. Each order has a trigger price — a threshold at which the order becomes active.

When you open a position, you can simultaneously set multiple TP/SL orders with different parameters. The system constantly monitors the current market price via the marking mechanism (a weighted fair value), and when the trigger price is reached, the corresponding order is executed.

Important: triggers operate independently. Reaching one trigger does not cancel others — until you close the entire position, remaining protective levels stay active. This allows traders to implement multi-stage exit strategies.

Two approaches to placing TP/SL orders

In derivative trading practice, there are two fundamentally different ways to use these protective tools:

1. Full position protection

This approach involves setting a single TP/SL order for the entire open position volume. When the trigger activates, the entire position is closed with a market order. This is a simple and straightforward method for traders planning to exit completely.

Advantages: clear and predictable — you know exactly what will happen when the set price is reached.

Limitations: cannot set multiple profit targets or partial exits.

2. Partial protection and multi-stage exit

A more flexible approach — placing several TP/SL orders for different parts of the position. When one triggers, the corresponding volume is closed, but the rest remains open with active protective orders.

With this method, you can:

• Lock in profits in multiple parts as the price rises
• Set different order types for different levels (e.g., market order for the first part, limit orders for subsequent parts)
• Flexibly adapt your exit strategy

Advantages: maximum flexibility and the ability to implement multi-stage trading scenarios.

Requires more attention to detail and planning.

Evolution of functionality: from basic to advanced features

Modern markets offer traders far more options than simple price triggers. Here are the main evolutions in this area:

Advanced features allow traders to use multiple criteria for triggers. For example, instead of relying solely on absolute price, they can set triggers based on achieving a certain ROI or P&L. This is especially useful in margin trading, where relative profitability matters more than absolute price.

Practical scenarios: when and how to use TP/SL

Let’s look at some real trading situations to better understand how to apply these tools in practice.

Scenario 1: multi-stage exit with different targets

A trader opens a long position on 1 BTC at current price $25,000. His plan:

• Close 0.5 BTC at $26,000 with a market order (first profit lock)
• Close another 0.5 BTC with a limit order at $30,500 (catch the second wave of growth)
• When the price drops to $23,000, close the remaining position (loss protection)

As events unfold:

1. Price hits $26,000 → first batch of 0.5 BTC is closed, remaining 0.5 BTC stays open
2. Price continues rising to $27,000, and the trader manually closes another 0.1 BTC → remaining position is now 0.4 BTC
3. At $30,000, the second TP triggers, and the limit order is placed at $30,500 waiting to execute
   • If the price reaches $30,500 → second TP executes, position fully closed
   • If the price falls to $23,000 earlier → stop-loss triggers for the remaining position

This scenario demonstrates how a trader can use multi-stage exit strategies to maximize profits.

Scenario 2: adding to a position with new TP/SL

Initial situation: trader already holds 1 BTC with a take-profit at $26,000 (0.5 BTC).

Then he places a new limit buy order for 1 BTC at $24,000 with its own TP/SL:

• TP: $27,000
• SL: $22,000

If the limit order executes:

• The new position of 1 BTC gets its own TP/SL, operating independently of the original order
• When reaching $26,000, the original TP (0.5 BTC) is triggered
• When reaching $27,000, the new TP triggers
• When falling to $22,000, the new SL triggers, protecting that part of the position

Key point: each order in the portfolio retains its own protective levels, allowing management of different parts with different strategies.

Scenario 3: replacing TP/SL when increasing position size

Trader holds 1 BTC with an SL at $20,000. Then he places a limit buy for 0.5 BTC at $28,000 with only a stop-loss for the entire position at $18,000.

Upon execution:

• Position increases to 1.5 BTC
• The old SL is canceled and replaced with a new SL at $18,000 for 1.5 BTC
• The system recalculates protection based on the new size

This shows how the system adapts TP/SL when the position size changes.

Scenario 4: limit TP with a market SL

Trader places a long order for 0.8 BTC at $30,000 with combined protective levels:

• TP: limit order at $40,000, placed in the order book at $41,000
• SL: market order at $20,000

Event development:

1. Order executes at $30,000
2. Price rises to $40,000 → limit TP activates and is placed in the order book
3. At this moment, the system cancels the corresponding SL (market stop at $20,000), considering this TP/SL set as a whole
4. If the limit TP executes at $41,000 → position closes
5. If the price does not reach $41,000 and drops → the system will re-place the SL for the remaining position

This scenario illustrates how to combine different order types for targeted goals.

Factors affecting order execution

Marking price vs. last trade price

Important: TP/SL triggers use the marking price, not the last trade price. The marking price is calculated as a fair value based on weighted indices and micro-price indicators. This prevents manipulation of trigger activation through individual trades.

Liquidation price and margin risk

When using leverage, consider the liquidation price. If the market price falls below this level, the system will forcibly close the position regardless of TP/SL.

An interesting case: with maximum leverage, the SL can coincide with the liquidation price. For example, at 100x leverage on BTCUSDT, the initial margin is 1%, and the maintenance margin is 0.5% (50% of initial). Therefore, the protective level can match the liquidation point.

Also, there are scenarios where SL is set below the liquidation price. When liquidation occurs, these SL orders are canceled because the system closes the position via liquidation first.

Multiple executions on large positions

If the position volume exceeds the maximum order size on the platform, upon TP trigger, the system will split the closure into several tranches. This means:

• Each tranche executes at the market price at trigger time
• Price may fluctuate between tranches
• On a single trading account, the system can send up to 6 repeated orders for closing

For remaining open positions, traders need to manually place new close orders.

Common questions about stop-loss and take-profit

Why was my position liquidated despite an active stop-loss?

Possible reasons:

1. Different triggers: if SL is based on marking price, and liquidation triggers first on the same criterion
2. Insufficient margin: if executing SL results in negative account balance (worse than bankruptcy price), the system will liquidate instead of executing SL to cover the deficit
3. Slippage: the best available price in the order book may be worse than expected, leading to greater margin loss

Why does the total number of orders for partial positions exceed the open position size?

The system allows setting TP/SL for a total volume larger than the current position. But upon execution, these orders only fill for the volume matching the open position. Excess volume remains inactive. This provides flexibility in planning.

How to check my TP/SL order history?

Active orders are visible in the “Open Orders” section, while executed or canceled ones are in the “Order History” section. There, all trigger details, executions, and final prices are fully displayed.

Can stop-loss be set below the liquidation price?

Yes, the system allows this, as each trader may have their own strategy. However, remember: once the price reaches the liquidation point, the system will close the position via liquidation, and the SL simply won’t trigger because the position is already closed.

Why does the stop-loss price match the liquidation price?

At extremely high leverage, the margin ratio is such that the protective level coincides with the liquidation point. For example, at 100x leverage, the required margin is 1%, and the maintenance margin is 0.5%, resulting in the SL aligning with the liquidation level.

What happens when I add volume to an open position?

The system recalculates TP/SL:

• When increasing the position: a new order may replace the old TP/SL or create its own protective levels
• When decreasing: the volume of TP/SL orders adjusts proportionally

Understanding how stop-loss and take-profit work is fundamental to disciplined and effective derivative trading. These tools allow traders to define their risk and profit zones in advance, transforming trading from an emotional activity into a systematic process. Proper use of these orders significantly improves results and protects capital in the long run.