What Is Stop Loss Strategy In Crypto Trading & How To Effectively Use It?

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Tired of losing money in this volatile crypto trading?

Well, it might be due to the unawareness of advanced trading features that you can use but aren’t using yet!!

Even, I had this problem initially but when I discovered about stop-losses features and stop-limit features that almost all big crypto trading exchanges provide, life became easy.

Well, these features aren’t that complicated as as they sound and that’s why I thought to make a quick introductory guide for you.

So let’s jump in and see what these features are and how they can help in preventing some of the day-to-day cryptocurrency losses.

What Is A Stop Loss?

Stop-loss as its name suggested is a feature inbuilt in the crypto exchanges to prevent further losses on a trade that you have already done.

After, all we trade for profits and not for losses.

However, the biggest part of trading is to manage your risks, and stop loss is one of the best way to manage risks in trading crypto, options or any other market. Thi

Stop-loss is a form of order that can be set in the exchanges and will be executed automatically when the preset conditions are satisfied.

For example, let say you bought BTC at a $50,000 price and now if the price is going up then you are profiting but if the price starts to dwindle down you will start losing. Simple maths, no rocket science!!

And in a scenario when the prices start to dwindle the idea is to prevent loss through the stop-loss feature. In this case, one sets a sell order at an amount that is a little less than its actual purchase amount. For example, we have set a stop-loss sell order at $49,900 and when this price is reached the stop-loss will be triggered and BTC will be sold at this price.

One might say this is still a loss of $100 but the idea of stop-loss itself is to minimize the number of losses incurred by the trader in event of a drastic pullback of the price of a cryptocurrency.

To understand its worth, just assume that you slept at night without setting up a stop-loss, and while that time the price of BTC starts falling apart and in just a few hours it has dropped 30% in price in which you have bought. So you see you can hedge your risk while you are away from your computer using stop losses. This is called a complete stop-loss when you put the whole amount that you purchased to be sold in an event of stop-loss.

Another type of stop-loss is called a partial stop-loss wherein you decide to sell half or some amount of crypto that you have purchased in an event triggering a stop-loss order. This type of stop-loss becomes important in a space like crypto which is so volatile.

Let say you purchased 100 ETH for $1500 each and have set a full stop-loss order at $1400 and you go to sleep. The price dwindles and the stop-loss at $1400 is triggered resulting in the sell-off of all the ETH to prevent further losses. You lost $10,000 (100*100$) in this scenario but the price next morning has even crossed $1550 per ETH due to volatility. Now, you will be forced to buy ETH at an even higher price than what you have already bought a day ago, this is an indirect loss.

But what if you had set a partial stop -loss this would have resulted in relatively less loss.

There are indicators like ATR that could be use to find an ideal stop loss. ATR will let you consider the volatility of script and thus you don’t become a stop loss hunt.

Another very advanced form of stop-loss is trailing stop-loss but unfortunately, you will not find this kind of stop-loss in any exchange. But if you ask me, this is the most appropriate form of stop-loss for such a volatile industry.

What is Trailing Stop-Loss:

For example, you buy 1 ETH for 0.05 BTC, and set in the system a stop-loss goal, for example, 10% (0.045BTC) and take profit is 20% (0.06 BTC). The trailing stop-loss always follows the price and moves the stop-loss after the price moves toward the target take-profit. For example, suppose the price of ETH increases by 10% (0.55 BTC). Now your stop-loss of 10% will be rearranged to 0.0495 BTC this way even if the stop-loss is triggered you will still be in some profits.

That’s why we have covered in the past such tools that help you set trailing stop-losses in some of these centralized traditional exchanges like Binance, Bybit or Phemex.

Stop-loss Vs. Stop Limit – What’s the difference?

Well, many people even get confused in the terminologies but let me tell you stop-loss order and stop-limit is one and the same thing.

A stop-limit order will be executed at a specified (or potentially better) price after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.  (Source- Binance Support)

Where these terms mean:

  • Stop price: When the current price reaches the given stop price, the stop-limit order is executed to buy or sell at the limit price or better.
  • Limit price: The price (or potentially better) that the stop-limit order is executed at.
  • Quantity: The quantity to buy or sell in the stop-limit order.

How To Set A Stop Loss on Binance

Login to your Binance account and follow this video tutorial to understand how to use stop limit and stop loss on Binance exchange.

Let’s see an example directly from Binance’s blog:

Let say, the last traded price of BNB is 0.000165 BTC, and the resistance is around 0.000169 BTC. If you think that the price will go higher after the price reaches the resistance, you can put a Stop-Limit order to automatically buy more BNB at the price of 0.000170 BTC. This way you won’t have to continuously watch market movements waiting for the price to reach your target price.

Approach: Select “Stop-Limit” order, then specify the stop price to be 0.000170BTC and the limit price to be 0.000172BTC, with quantity as 10. Then click the button “Buy BNB” to submit the order.

To Query Existing Orders: Once orders are submitted, existing ‘stop-limit’ orders can be found and reviewed in “open orders”.

When orders are executed or discarded, your stop-limit order history can be found in “My 24h Order History”.

Conclusion: Stop loss in Cryptocurrency trading

Having said everything, ultimately stop-loss or stop-limits gives you the freedom and helps you manage the risk during the turbulent times of cryptocurrency market.

While using this feature one need not sit always in front of their computer and if this feature is used wisely a lot of loss can be prevented which will ultimately be your profit.

If you like the post, don’t forget to share it with your friends and family on social media! 

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