TP/SL stands for Take Profit/Stop Loss order. These orders allow traders to automatically close open positions when the price reaches a certain level. As the name suggests, a take profit order locks in profits when the price moves in the trader's favor, while a stop loss order stops losses immediately when the price moves in the trader's unfavorable direction to prevent further losses.
Both orders help manage your risk and reward in trading. For example, if you are long BTC with 1x leverage, the entry price is $30,000, and you want to control your profit and loss to a maximum of 20%, then you can set a profit closing order at $36,000 and a stop loss closing order. The order is at $24,000.
Suppose BTC hits $36,000, triggering a profit closing order, and your position will be automatically closed. Regardless of what BTC’s price does next, you’re guaranteed to earn +20% on your principal.
Some exchanges also allow you to customize other parameters of TP/SL orders. For example, you can choose a market or limit order when the price reaches your target price. For example, a stop-market order is called a stop market order, and a stop-limit order is called a stop limit order. The difference is that a stop market order becomes a market order when triggered, meaning it will execute at any price. In contrast, a stop limit order becomes a limit order when triggered and will only execute below the preset trigger price.
You can also select the percentage of your position that you want to close at a certain price, which means you can place multiple TP/SL orders in the same direction. For example, in the previous BTC trade, you could have set up to close 50% of the position at $36,000 and the remainder at $40,000.