1 October 2024
Stop-Loss Order in Crypto Trading | Explained
It is clear that the only reason why we trade is to make money, and losses are nonetheless unavoidable especially while trading in a volatile market. Wouldn’t it be terrific if all of our Crypto investments resulted in speedy profits and low losses?
Whether you’re new to the Crypto sector or have a lot of expertise, you’re unlikely to say no. But what if there was a way to reduce these dangers? If you’re thinking about a stop-loss order, then you’re correct! It is, in fact, one of the most widely used risk management strategies for limiting possible losses.
Also read: 8 Useful Tools For Crypto Trading
A stop-loss order is a common order type used by traders to exit a position when the price moves against them until it reaches a certain threshold. When the price reaches that level, the trading platform immediately closes the position to prevent further losses. It’s easy to overlook certain essential variables while determining whether or not to buy a stock because there are so many factors to consider. One of those considerations could be the stop-loss order and when used correctly, it can make a huge impact. This is a tool that almost anyone can use.
While trading digital currencies like Bitcoin and Ethereum, you must avoid substantial losses in volatile trades, which are extremely prevalent in the Crypto market. However, while considering to trade Cryptocurrencies, there are numerous factors you should consider. When you’re focused on earning profits, it’s easy to forget about risk management. It’s critical to utilize a stop-loss order while trading in the Crypto market since it can make all the difference. Most traders can profit just by using a stop-loss order in general.
What is Stop-Loss order in Crypto Trading?
Stop-loss is a mechanism implemented into Crypto exchanges to avoid future losses on a trade. After all, we trade to make money, not the other way around i.e. to lose money. Stop-loss orders are a type of order that may be set on the exchanges and are automatically executed when the specified conditions are met.
A stop-loss order is an order placed with a broker to purchase or sell a specific stock once the stock reaches a certain price. A stop-loss order is used to keep an investor’s loss on a security position to a minimum only. For example, if you set up a stop-loss order 10% below the price at which you bought the stock, it will restrict your loss to 10%. Assume you recently purchased Microsoft (MSFT) for $20 per share and you place an $18 stop-loss order immediately after purchasing the stock. Your shares will be sold at the current market price if the stock falls below $18.
Also read: Top 9 Price Action Crypto Trading Strategies
Types of Stop-Loss:
1. Complete or Full Stop-Loss
A complete stop-loss allows you to sell the entire amount that you purchased, if the price drops dramatically overnight. You can use the stop-loss to reduce your risk while you are away from your computer. While you may lose out on a potential profit, you will avoid having a negative account balance. This sort of stop-loss is better suited to a market that is stable and has a low risk of price drop fluctuations.
2. Partial Stop-Loss
In a partial stop-loss, you might choose to sell half or a portion of the Crypto you purchased in response to an occurrence that triggers a stop-loss order. This type is especially effective for volatile assets like Crypto since it ensures that the trader has some assets left if the price lowers before a spike.
3. Trailing Stop-Loss
A trailing stop-loss is a more advanced sort of stop-loss in which the value is changed in response to price movements of the asset. As a result, if the Crypto price rises, so will the stop-loss value. However, if the price falls, the stop-loss value will remain the same and the stop order is activated if the stated value is obtained. This is an excellent approach to stay on top of the price changes without having to alter the stop-loss manually every time.
When to use it?
A Crypto trader will employ a stop-loss order to limit possible losses to no more than they can bear, as opposed to a limit order which attempts to profit from existing trends. This is not simply a step towards maximizing earnings, but it also broadens the traders' planning possibilities by giving them more control over the trades risk factor. To use a stop-loss properly, the trader must still foresee how the market will behave and design the stop-loss correctly; otherwise, the stop-loss may not only fail to avoid loss but may also increase it. Once the trader has a good sense of how the market will react, they must decide on the stop-loss order’s value and type.
Also read: 9 Top Crypto Trading Bots
Pros:
- Prevent Excessive loss.
- You can increase your stop-loss as the price rises, allowing you to earn more and more profit.
- Helps in monitoring multiple deals.
- Allows you to choose the amount you are willing to risk
Cons:
- Sometimes it may end up dealing too short.
- Little difficult to utilize.
The Bottomline:
As stop-loss is meant to limit the damage caused by the trend swings, it does include some loss of assets. When picking a stop-loss, Crypto traders must examine the risk-reward ratio further and the value of the traded asset. They ought to even be able to foresee the market's overall behaviour. Eventually, stop-loss is simply just a tool, and the choice to use it is based on the trader's analysis of the market. The success of a stop-loss is determined by how well that analysis is performed.
Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.