What is a good stop loss crypto?
The cryptocurrency market is very young, and the non-regulation that surrounds it contributes to its strong attractiveness. Indeed, the significant volatility of these assets allows for significant gains, which attracts traders and neophytes. But you have to keep in mind that while you can win big, you can also lose everything. Therefore, when buying cryptocurrencies, we are not sure that the prices stay high for very long or continue to rise indefinitely. Fortunately, to protect themselves from a dump, traders can set crypto stop losses on their positions in crypto trading. We will see in this article what a crypto stop loss is and what types exist.
What is a stop loss crypto?
A crypto stop loss is a conditional order, i.e., it is an order that will be sent to the market after a condition is met. This condition takes the form of a price not to be crossed. Therefore, if this price is exceeded, the position is closed automatically (the purchased cryptocurrencies are sold). Stop Loss, unlike Take Profit, protects against a drop in the market price. The selling price must therefore be below the current market price.
Example: You open a position of 1 Bitcoin at 10,000 € / BTC. At the same time, you place a Stop Loss at € 9,500. If the price reaches 9,500 €, your position will close automatically. Thus, you could recover 95% of your initial stake.
How to set a stop loss crypto?
But how to place this type of trading order properly and take full advantage of it?
It is crucial to consider different parameters to get the most out of it. First and foremost, you have to take into consideration the volatility of the trading instrument.
If the fluctuation is high, you must choose a level far from the current price to prevent the crypto stop-loss order from being triggered too soon.
Always keep your investment goals in mind. Thus, if we deduct, for example, a gain of 25% over 6 months, do not place a crypto stop-loss order at a 3% loss. Over six months, there is plenty of time to reach your goal.
However, the crypto stop loss would be triggered quite quickly. Ultimately, it is a good idea to carefully look at the evolution of the assets you are interested in.
The goal is to analyze their resistance as well as their support levels.
It is hence recommended to place a stop loss somewhat below significant support.
Finally, stopping loss saves the trader from having to monitor how their assets are performing daily.
If you are a newbie to online trading, feel free to use the Stop order on high volatility assets to limit your risk.
Why use a stop loss in a trade, and how to calculate it correctly?
The stop loss must be defined in order to minimize and control possible losses during the evolution of the price. Even the best strategy periodically gives false signals, and opening positions with these false signals can lead to losses.
The stop loss helps keep these losses to a minimum, allowing a trader to quickly make up for lost funds and attempt to gain further capital gain.
The stop loss can be set when opening the position or later. However, it is best to program this order as soon as the trade opens, as prices can be highly volatile in the crypto market and vary in just a few seconds.
If a movement occurs in the opposite direction to that predicted by the trader, the stop loss will reduce the losses resulting from the position. Suppose a strong price fluctuation occurs immediately after opening a trade in which the stop loss has not been set in advance (for example, a trader has decided to do this a little later). In that case, the funds will not, to a certain extent, be protected and may be lost.
How to calculate the correct stop loss
Besides using the crypto stop loss calculator, there are many ways to calculate the stop loss value for a specific trade. In most seasoned trading strategies, it is already decided under what conditions and at what distance from the opening price of a position a stop loss should be placed.
Also, there are also several universal tactics for calculating and installing a floor value, which we will cover a little later in this article.
There is also a well-known rule that is recommended for all traders, especially beginners. The rule is as follows: losses in each position must not exceed 2% of the total capital. On this basis, it is easy to calculate the corresponding stop loss.
The different types of stop-loss
Forex has three types of stop-loss, each of which works differently and allows a trader to access a single result.
The standard crypto stop loss
The standard stop loss is the one offered by most brokers on their platforms. The order works as follows:
A trader places a stop-loss order at a specific price.
When the actual market price reaches this value, the transaction is closed at the market price.
The stop loss is set only once and remains unchanged (unless the trader himself modifies it manually).
The main disadvantage of such an order is that it is subject to “slippage.” If the price jumps several points during a gap, then the stop loss “jumps” the value for which it was programmed.
The limit stop loss
The limit stop loss works on the same principle as the standard stop loss but offers a significant difference. When a limit stop loss is triggered, the trade will permanently be closed precisely at a price set by a trader. This is a limit order, not a market order.
In other words, the guaranteed stop order is not subject to slippage in the event of a gap. The broker agrees to close the transaction at a price defined in advance and assumes all risks related to volatility. Still, the broker may sometimes charge an additional commission for such a guarantee.
The trailing stop loss
A trailing stop loss is different from a standard stop loss and a limit stop loss because its price may move after it has been programmed.
Stop loss is thus not defined at any particular price. It is always linked to the market price in real-time. It can be set, for example, at a distance of 20 points from the market price.
Thus, if the price moves in the direction desired by the trader, the trailing stop loss “pulls” it’s programming behind it and always remains at a distance of 20 points from the market price. On the other hand, if the price turns in the opposite direction, the stop loss remains in place.
By using a trailing order, the trader can guard against excessive losses and protect a portion of the profits. A trailing stop loss can be used to ensure the recovery of gain instead of programming a “take profit” order which risks minimizing the latter.
Based on volatility
Setting a stop loss based on volatility is an effective technique. In this situation, a trader may see the stop loss activated beyond the main range of price movement. It then ensures that the order will trigger if the range is too large and the value is accidentally “touched.”
Defined from the chart
When placing a stop loss on the chart, key levels (support and resistance), as well as local extremes, are taken into account. They must be determined before opening and closing a position. Setting a stop loss is most effective when the trader is trading based on technical analysis. In this arrangement, the definition of levels, extremes, and other important elements occur during the graph’s general analysis.
The stop loss should be set beyond the nearest level or the local extreme if the stop is set at or ahead of it (relative to the price). The probability that it will be affected by random fluctuations increases.
Based on duration
Stop losses of this type are not defined by price indications but by time parameters. For example, a trading strategy might force the investor to close a trade at the end of the trading session, regardless of the outcome. This type of stop-loss is not very popular and is used very rarely.
Conclusion
Stop-loss is an essential part of the trading system. It makes transactions more secure and controlled. It can be difficult for a newbie trader to understand all the nuances of immediately placing a stop-loss order. The best option would therefore be to start by mastering the most straightforward techniques. Stop loss is surely the essential tool of a trader who applies healthy money management. An investor can, with some brokers, combine the various stops – stop loss and trailing stop – in order to give themselves the assurance of a little more protection of their positions.
