Recently, I’ve been talking to friends about trading and found that many people simply don’t understand what stop-loss means, and some even lose all their principal before regretting it. Instead of letting this happen over and over, it’s better to properly understand the strategy of taking profits and cutting losses.

First, let’s talk about taking profits, which means decisively selling when you’ve made money to lock in gains. Many people have the problem of wanting to keep going when prices are rising, only to get trapped. Stop-loss means the opposite: when the price drops to a level you can tolerate for losses, you cut your losses and exit to prevent losing even more. Using these two mechanisms together can truly protect your capital.

Why is this so important? Because the biggest enemy in trading is human nature. Without take-profit and stop-loss, you’ll be driven by greed and fear, making a bunch of bad decisions. Once you set trigger prices, the system automatically executes trades for you, completely eliminating emotional interference. I’ve seen too many people lose money because their mindset collapses—that’s actually due to the lack of this mechanism.

The numbers also make this very clear. Suppose you buy a coin at 1000 yuan, hoping to make 200 yuan profit, so you set a take-profit at 1200. If you can only afford a maximum loss of 100 yuan, you should set a stop-loss at 900. But here’s a detail—the concept of trigger prices. If you place a sell order directly at 900, it will execute immediately when the current price is 1000, which isn’t what you want. So, you should set the trigger price at 900, and the stop-loss price at 890, so that the system only creates a sell order when the price actually drops to 900.

There’s also an advanced method called trailing stop-loss, which doesn’t use a fixed price but adjusts based on a relative ratio. For example, setting a trailing stop-loss of -200 means that if the price rises from 1000 to 2000, the stop-loss will automatically move up to 1800. This way, you can protect profits without being limited by rigid numbers.

Many trading platforms have this feature built-in. You can set it up when placing your order, saving the hassle of manual adjustments later. Both market orders and limit orders can be combined with take-profit and stop-loss; the difference is that market orders execute immediately, while limit orders only execute when the price reaches your specified level. Which one to choose depends on your trading style.

Honestly, mastering the risk-reward ratio is a mindset of advanced traders. Before entering a trade, plan it out: if there’s an 80% chance to earn 10 and a 20% chance to lose 30, because 80×10 > 20×30, this trade is worth taking. Conversely, if you can’t calculate a positive expected value, you shouldn’t enter.

How to set the best take-profit and stop-loss ratios? There’s no absolute answer, because everyone’s risk tolerance is different. My advice is to set take-profit at a level where you feel satisfied with your gains, and stop-loss at a point where the loss would make you feel heartbroken. Some look at support and resistance levels, others at moving averages—either is fine, as long as you have the discipline to follow through.

In the long run, practicing take-profit and stop-loss helps you discover whether your trading strategy is effective. If after half a year you’re still losing money, it’s time to adjust your strategy or admit that this method isn’t suitable for you. This is much more rational than blindly trading and blaming the market for unfairness.