Stop Losses For Cryptocurrency Traders
What is a stop-loss order?
A stop-loss is a type of order you can use on a range of exchange platforms to try and limit your potential trade losses. When you invest in a coin, you can place a stop loss on it, meaning that a coin has a sell order on it if the coin’s price drops below a certain percent, say 5%, of what you originally paid for the coin. Sell orders aim to limit the amount of money you will potentially lose on any given trade.
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Stop losses in the cryptocurrency market
While stop losses aim to reduce the potential loss of a trade, it is not always advantageous within the cryptocurrency market. This is largely due to the unregulated nature of this market and the reality that the market is largely consumer-driven whereby the investments and trades of others cause price changes. This occurred on GDAX in 2017 when an investor placed a multi-million dollar sell order at the market price. This caused the stop-loss orders of hundreds of other investors to be triggered and many people lost money.
When stop-loss orders are useful
Stop-loss orders are, for the most part, unwise in the cryptocurrency market. However, there are some instances where they can be positive and the risk of using them can be minimized.
1. Exchanges that allow you to modify your stop loss after starting the order
When you are able to modify the stop-loss order throughout the trade, they can work effectively. This functionality enables you to set a very low stop-loss order at the beginning of the trade and change it if the trade goes positively. An investor can then set their stop loss at a positive value, meaning that it will sell above the entry price.
2. Trading altcoins in the short term
Stop-loss orders can be useful when you are trading to gain fiat currency. In this case, if a coin is indicated to increase in price, an investor might set a profit order and a stop-loss order with 25% of the entry price. This will allow you to make some money if you correctly predict the changes in price for a coin.
3. Trading altcoins in the long term
If an investor has analyzed the coin and found indicators which predict that the value of the coin will increase over the long term, they can place a sell order at large profits. Additionally, it is suggested that a much lower stop-loss order should be created. This is because when investing for the long term changes such as bad media coverage of the coin or exchange being hacked could result in the price of the cost dropping to zero, meaning that all investments would be lost.
Exchanges that allow stop-loss orders
Not all exchanges allow stop-loss orders to be set up on a trade. The following are two of the best exchanges for using stop-loss orders.
- Binance- This exchange allows stop losses through their ‘Stop Limit Orders’.
- BitMEX- This exchange allows stop losses through their ‘Stop Price Orders’. Please note, using high stop-loss orders on this exchange is risky and investors should only decide on a stop price after considerable analysis of the coin.
Final Notes On Stop-Loss Orders
In conclusion, it is clear that as a general rule, stop-loss orders are inadvisable in the cryptocurrency market. However, there are instances when you are investing in a trade where a stop loss may be positive and the risks associated with this order can be minimized. If you are considering setting up this order, it is advised that you conduct a thorough technical and fundamental analysis of the coin to determine the best price at which to set the order.