Once you start trading cryptocurrency through manual or automated approaches, you may stumble upon the term “Stop Loss” quite a few times. In order to maximize your profits and prevent avoidable losses, it is critical that you learn what is stop loss and how to make use of it during your trades.
Fortunately, learning this information is not difficult at all. By going through related details for just a few minutes, you can easily know how to integrate stop loss into your trading strategies.
To help you through this process, here is a guide to stop loss and its relation to cryptocurrency trading.
What is Stop Loss?
Stop loss is a type of trading order that is executed when a respective asset’s price reaches a certain value. The goal of the order is to buy or sell an asset or cryptocurrency when its price reaches a certain figure. Setting up a stop-loss order triggers automated trades even in your absence and prevents losses for your trading strategy.
Once you learn what is a stop loss order, you can use it against the assets that you have a vested interest in at any time. For instance, if you purchased Bitcoin at $100 and set the stop price at $80, your Bitcoin will be sold automatically when it reaches $80. This makes sure that you don’t have to bear further losses in case Bitcoin’s price keeps dropping in the near future.
This mechanism makes stop loss orders a highly sought after mechanism that is often used by traders with different investment portfolios. If you want to benefit from trading strategies that cut your losses and improve your profits, placing stop loss orders stands out as a great practice.
What Types of Stop Loss Orders Are Available?
There are two types of stop loss orders that are available at almost all major exchanges.
- Sell Stop Order
- Buy Stop Order
Once you learn what is stop loss, understanding the difference between these order types becomes a walk in the park.
Sell Stop Order
A sell stop order requires you to set a stop price that stands below the current market price. If your asset drops to the predefined value, your stop order becomes a market order and becomes fulfilled at whatever the updated market price is at the time of the transaction.
Once you learn what is a stop loss order, it becomes clear that the sell stop order is used for long positions, where you have purchased the asset with the intention of holding it for profits. If your asset’s price seems to be going the other way, a sell stop order helps you cut your losses before they completely break your wallet.
Buy Stop Order
A buy stop order is set at a stop price that is above the current market value of the respective asset. This means that your stop loss order becomes a market order only when the asset value increases and reaches a certain point.
This type of stop loss order is utilized by those who are protecting their short positions, where they have to buy the asset before it becomes too high in value. This provides such traders with a mechanism to reduce their losses in case the asset’s price that they hope to decrease goes on an upwards trend instead. This makes it important to learn what is stop loss and how you can use it to your benefit.
What is a Stop-Limit Order?
A stop-limit order triggers as a combination of a stop order and a limit order. Within this order type, you can steer clear of the chances that your stop order will trigger due to a sudden yet temporary market movement and cause you to lose out on profits.
After you learn what is a stop loss order, you can easily grasp that a stop-limit order works by putting a limit price to it along with the stop price. When the stop price is reached, the order becomes eligible to become a market order. But it doesn’t fulfill until it has also touched the limit price. This dual condition saves you from making trades that are triggered at sudden market movements.
What to Remember While Using Stop Loss Orders?
Stop loss orders stand out as a must-follow practice for many traders. However, you need to remember a few points regarding this strategy to ensure that you aren’t blindsided by their possible results.
Your Orders May Trigger at Unpredictable Prices
While stop loss orders trigger your orders at your specified price, actually fulfilling these orders may take some time. As a result, your order may get fulfilled below or above your stop price.
Stop-Limit Order May Keep You From Fulfilling Your Order
Stop-limit orders may help protect you from selling or buying your asset due to sudden but temporary price fluctuations. But the high specificity of these orders may keep your stop order from turning into a market order.
Check for the Rates of Different Platforms
After learning what is stop loss and how you can use it, you can easily check which exchanges allow you to work with these orders. Apart from shortlisting these exchanges, you should also compare their trading fee and related pricing.
This ensures that you are able to work with platforms that allow you to use these necessary safety mechanisms, while also not having to pay unjustifiably high prices for it. Since nearly all popular exchanges offer stop loss in their advanced order forms, this requirement is not difficult to meet.
By keeping this information in mind, you can reap the rewards of using stop loss across different trades. With practice, you can also utilize these mechanisms with full confidence, while being rest assured in the knowledge that you can cut your losses and maximize your profits whenever possible.