Cryptocurrency volatility makes trading a profitable strategy on the crypto market, but at the same time introduces an additional element of risk. A trader may not have time to conclude a deal at a favorable moment, and on a deal concluded a minute later he can lose a large sum, because the course has suddenly been adjusted too much. In similar, as well as in many other cases, stop loss comes to the rescue. What is a stop loss in cryptocurrency trading and how to use it? We will describe in this article!
How does a stop loss in cryptocurrency trading work?
Stop loss in crypto trading is an order of the cryptocurrency exchange to automatically open a cryptocurrency sale order when the price of the cryptocurrency falls to the point specified by the trader.
Let us suppose that cryptocurrency costs $ 100, a trader buys it, hoping that it will grow to $ 110. But he is mistaken, and the currency falls to $ 95. If he sells it now, he will lose $ 5. He can wait until it grows back above $ 100, and sell then. However, if the market falls – the currency may fall even more, and then the trader will lose even more.
Understanding this and the fact that mistakes happen, the trader determines in advance the maximum amount that he is willing to lose, and, accordingly, the minimum amount for which he is ready to sell cryptocurrency.
Let him be willing to lose $ 10 and sell the currency at $ 90. To lose $ 15 and sell it for $ 85, he is no longer ready. He sets a stop loss price of $ 90, and if the rate drops to this mark, the exchange automatically places a stop loss order to sell at that price. The trader loses the permissible $ 10, but does not lose the unacceptable $ 15 and more.
The above example is an example of the use of stop loss on medium and long time periods. The described situation could occur within 20 minutes or, say, 5 hours. In the first case, the rate fell faster, so the stop loss worked after 20 minutes. In the second case, the rate fell more slowly and approached $ 90 in 5 hours.
Scalpers receive a small profit on each transaction, so it is important for them to limit losses, otherwise large losses against the background of small profits will lead them to a minus. Therefore, scalpers set the stop loss price as close as possible to the current one. Thus, the stop loss is triggered when the asset falls weakly and scalper losses are minimized.
In a falling market, stop loss is used everywhere. All traders see that cryptocurrencies are falling, but no one knows how much and how sharply they can fall. Therefore, the maximum allowable loss using stop loss indicates the majority.
When a trader takes a position, the exchange provides an opportunity to fill in the “stop loss” field, and many believe that it is wiser to fill it than not to fill it. Filling the field does not require anything, but in the case of an unpredictable trend reversal can save money.
Kinds of stop loss in cryptocurrency trading
Stop loss price is set at the opening price of the position. In the best case, a trader earns money, at worst, he stays with his money, because the exchange sells the cryptocurrency bought by him at the same price at which the trader bought it. The peculiarity of such stop loss can not be immediately indicated. The exchanges set the minimum allowable intervals between the stop loss and the current price of the asset, so the trader will have to wait until the cryptocurrency price rises by the required number of points, and then shift the stop loss to break-even. For example, he buys a $ 50 cryptocurrency, at the time of opening a position, he sets a stop loss of $ 40. Further the cryptocurrency grows, the trader waits when it rises to $ 60, and sets a break-even stop loss at $ 50. Such a stop loss is applied only in a growing market.
Stop loss price changes depending on the cryptocurrency price change. Theoretically, the trader himself can adjust it, almost all large stock exchanges can do it automatically. When installing an automatic trailing stop loss, the number of points is prescribed, on overcoming which stop loss should change. For example, the cryptocurrency must rise by 10 points, so that the stop loss will rise by another 20 points, so that it will rise a second time, and so on. Often, a rolling stop loss comes to levels that exceed the purchase price. For example, a trader bought a $ 50 cryptocurrency and set a stop loss price of $ 40. The cryptocurrency rose to $ 60 – the price of a stop loss rose to $ 50 a cryptocurrency rose to $ 70 – the price of a stop loss rose to $ 60, and so on. Most often, such a stop loss is used in a growing market in order to take profits if the price has risen to $ 70, and the stop loss is up to $ 60; the trader will not receive less than $ 10 in profit.
This is the easiest option in this classification. He is neither a trader nor the stock exchange changes or moves anywhere. The trader simply determines for himself how much he is willing to lose, sets the appropriate stop loss and trades. Fixed stop loss is used, as a rule, only for insurance, that is, the trader hopes that it will not come to a stop loss.
Set for the full amount of the transaction. For example, a trader buys a $ 50 cryptocurrency and sets a stop loss of $ 40 – insures all of his $ 50. It is used for short periods in a stable market, when the risk of sudden sharp drops and subsequent jumps is minimal in a falling market, when a sharp jump in prices upwards is unlikely.
This stop loss has to be set at the part of the transaction amount. For example, a trader buys a $ 50 cryptocurrency, but the stop loss sets only half – at $ 25. The remaining $ 25 he is not insured. It would seem unwise, but. It may happen that the rate of cryptocurrency will fall sharply, forcing the stop loss to trigger and close a position at a disadvantageous, albeit acceptable, price for the trader. Immediately after this, the course can also jump sharply, taking off from the stop-loss price of $ 40 to all $ 70. The trader as a result loses money and misses the potential profit due to an accidental, albeit a strong recession. If the stop loss works only at half the amount, then the losses of the trader will be half less. This stop loss is used in very volatile, unpredictable markets, as well as during flat or heavy fluctuations, when the price can with equal probability fall and rise.
Disadvantages of using stop loss in cryptocurrency trading
Often, properly used stop loss not only saves the funds of the trader, but also provides profit. At the same time mistakenly used, it can lead to losses.
When the market is unstable, stop loss will be dangerous. Especially this danger is manifested on the crypto-market, which tends to fluctuate very strongly and can penetrate even the most minimal stop loss, and then, as if nothing has happened, it has risen even higher. There are many precedents.
For the same reason, too low stop loss prices are dangerous on a crypto bank. For example, trader buys a $ 50 cryptocurrency and puts a stop loss at $ 40. If market fluctuations break through a stop loss, he loses only $ 10. If he puts a stop loss is not $ 40, and $ 25, then in case of strong market fluctuations, he will lose already $ 25.
But too high stop loss are dangerous, because they can work too often. For example, a trader will lose $ 10, then reopen a position and place the same stop loss, the market will still fluctuate – and the trader will lose another $ 10. Often this happens even in a growing, simply highly fluctuating market.
For example, the market drops very sharply and dramatically, the price changes literally every minute. If the stop loss is triggered at a certain level and the transaction is not concluded at that moment, in two minutes the set stop loss price may no longer be relevant and no one will simply agree to such a transaction.
Accordingly, in this situation, the stop loss for the trader is useless. True, those who want to make a deal are usually found, and this risk is present mainly on small exchanges or when trading in unpopular cryptocurrencies.
For example, a trader buys a $ 50 cryptocurrency, and a cryptocurrency comes to $ 70, a stop loss – to $ 60. Then there is a correction – and the stop loss is triggered at $ 60, although the currency is clearly and stubbornly growing, and in ten minutes it already reaches $ 80. A trader could receive $ 30 profit, but in the end receives only $ 10.
Of course, he can immediately, at $ 60, open a new position. But, firstly, he is unlikely to react so quickly with the rapid growth of the market – most likely, he will open the position by $ 62-65. Secondly, there are also exchange commissions, and each extra transaction is a minus commission.
Should I use a stop loss in cryptocurrency trading?
Some traders believe that on the crypto market, for the above reasons, stop loss is fraught with use, it is better to track all fluctuations on your own and place all orders manually. Others believe that it is impossible to do without a stop loss on a cryptobank, because of the same excessive fluctuations.
Suppose that in some cases, stop orders are triggered idly and cause losses, but in another part they save the trader from significant losses. In a fast-falling market, a trader often does not have time to manually place an order in time, while the program does so and finds a buyer in moments. The account is on the moment and goes.
Both of these opinions have the right to life. Of course, the mistake of many traders is that they rely too much on stop loss. Even in more stable markets it is dangerous, and on a fluctuating crypto market, it is even more unwise to set stop loss and go about your business.
But fast automatics (much faster than a trader) on a crypto market can help a lot. Therefore, it makes sense to use both opinions in one and stop loss to use – but carefully in accordance with experience.
So, excessive use of stop losses causes novices to sin, and basically this leads to incessant losses. Therefore, novice traders are usually recommended to minimize the use of stop loss and trade manually as much as possible. Only in this way will it be possible to track when automation can help at the expense of speed, and when the conscious reasoning of a person is more valuable than speed.
For example, in one situation only partial ones are used, in the other – complete ones. In the market, one cryptocurrency does not see the danger in sliding, and in the another market prefers to save on a fixed basis, but they do not count on it. And such use of stop losses is justified and useful.
Stop loss is a simple tool, but here, as with any other tool, a fire can be made even with a simple iron, if you do not know how to use it. The ability to use the tool gives additional advantages, allows achieving higher results – and the stop loss entirely falls under this simple model.