Use a Stop-Loss When Day trading on leverage

Setting a stop-loss is the most important trading tool for cryptocurrency traders. To have a profitable experience trading digital currencies such as Bitcoin and Ethereum, you must avoid significant losses in volatile trades, which are common in the crypto market.

A stop-loss is a trading tool used to limit a trade’s maximum loss by automatically liquidating assets when the market price reaches a predetermined level. There are various types of stop-losses that can be used in various scenarios depending on the state of the crypto market. Because of the many possible market outcomes, it can be difficult to avoid loss at times, but stop-loss can be useful even for new and young traders.

What exactly is a stop-loss order?

A stop-loss order automatically closes a cryptocurrency position when the price reaches a predetermined level. Stop-losses are critical for risk management because they allow traders to determine what position size to take and how much money to risk in a single trade.

A large trading position has the potential to wipe out the majority of your gains. Setting stop-loss orders for each trade is the best stop-loss strategy, especially when day trading cryptocurrency!

A stop-loss order is a more advanced version of a standard market order. The distinction is that with a stop-loss order, you specify a condition that must be met when a market order is placed on the order book.

Additionally, stop-limit orders work in the same way as stop-loss orders. However, as the name implies, there is a price limit at which they will execute. A stop-limit order specifies two prices: the stop price, which converts the order to a sell order, and the limit price. Instead of becoming a market order to sell, the order is converted into a limit order that will only execute at the limit price (or better).


When does it take place?

A cryptocurrency trader will use a stop-loss order to limit potential losses to no more than they are willing to accept, as opposed to a limit order, which aims to profit from current trends.

This is not only a step toward maximizing profits, but it also broadens the trader’s options for strategizing by increasing their control over the risk factor of the trade. To use a stop-loss effectively, the trader must still predict how the market will behave and tailor the stop-loss accordingly—otherwise, it will not only fail to prevent loss but will also multiply it. After determining how the market will behave, the trader must select both the value and type of stop-loss order.


Types of stop-losses

Full

When triggered, it liquidates all crypto assets. This is useful in a stable market with unexpected price fluctuations, as any price drop is expected to be small. While a surge backup means the trader will miss out on potential profits, they will avoid a loss if the price of cryptocurrency remains low.

As a result, when determining a full stop-loss, the trader must weigh the risk and reward of both scenarios.

Partial

When triggered, it liquidates a specified proportion of digital assets. This can be useful in a volatile market (such as the cryptocurrency market) to ensure that the trader still has some assets if the price drops before a surge.

However, it leaves the trader with potentially unwanted assets, and if the price remains low, they will continue to lose money. In a highly volatile market, this can be effective as a damage control tool, but it cannot guarantee the safety of the trader’s assets. It must therefore be used with the full understanding that the risks remain high.

Trailing Stop loss

The stop-loss value will change in response to price fluctuations in the crypto asset. The trailing distance is defined as the difference between both the current asset price and the stop-loss value. If the price of the cryptocurrency rises, so will the stop-loss value. When the price falls, the stop-loss value remains unchanged, and a stop-loss order is triggered if the specified value is reached.

This is preferable to set stop-loss orders because it allows the trader to limit their maximum loss despite how far the trends have moved in their favor. Furthermore, the trader is no longer required to manually adjust the stop-loss in response to market changes.

But, keep in mind that in a steadily rising market, trailing stop-loss can become a liability, as strong rising trends frequently drop before continuing to rise. As a result of a short trailing distance, the assets may be liquidated before the price reaches its upper limit.

Personally, trailing stop-losses have a nasty habit of stopping you out too early – I use a manual trailing stop in some circumstances.


The issue with using stop-loss orders on cryptocurrency exchanges

Assume you are trading Bitcoin (BTC) and you enter the market at a price of $58,000. You decide that if the price of Bitcoin falls to $57,000, you will sell and close your position.

If you choose to manually close the position, you must closely monitor and follow the market. This means that if you were trading on a cryptocurrency exchange, the only way you could do so is by setting price alerts, which notify you when the cryptocurrency reaches a certain price.

You would need to sell the cryptocurrency as soon as it fell below $57,000, but there could be market delays when trading manually, which could be costly.

In this case, placing a stop-loss order to close your trade if the market moves negatively would be a better option to avoid heavy and further losses.

However, if you place a stop-loss order on the crypto exchange, your balance is frozen, which means you can’t sell your Bitcoin at a higher price and guarantee a profit. This means you’d have to set another perhaps several price alerts to notify you when Bitcoin reaches profitable levels above $58,000.

Here’s how I move my stop-loss into profit:


Risks to watch out for when using a stop loss

If full stop-loss orders are excessively high, the trader may miss out on a price increase that exceeds the stop-loss value. In a volatile market, this is highly likely.

The trader risks losing money if the stop-loss value is set too low and the price drops but then resumes its steady trend. If the stop-loss is triggered, the trader will lose more with a low stop-loss value than with a high stop-loss value, though it may have been a better choice if the trader believed the market would recover after a drop that did not trigger the stop-loss.

While trailing stop-loss appears to be safer in a stable market, it can be a liability in strong upward trends. Partial stop-loss is of little use in a stable market but can be extremely useful when trading with highly volatile new coins. However, all risk is associated with poor decisions regarding the type and value of stop-loss as a result of incorrect market analysis—much like any trading tool that can be harmful if not used correctly.


What others say about using stop losses

Some believe that stop-losses are primarily (and ineffectively) used by inexperienced traders, which has some validity. Stop-loss can be deceptive for new traders because it is sometimes viewed as a failsafe rather than the complex and carefully planned insurance policy that it should be when used correctly.

But, in the hands of an experienced trader who is knowledgeable about the market, a stop-loss can be a valuable tool that can save both time and money. However, using it arbitrarily without understanding the purpose and use of each type of stop-loss will result in damage.

However, inexperienced traders working within their comfort zone in stable markets can benefit just as much from it, as long as they stick to strategies they understand and manage their assets wisely. Trading in a highly volatile market is obviously more difficult and has a lower success rate than trading with relatively stablecoins. Damage control via stop-loss (partial in this case) may be more difficult and less successful unless a trader is confident in their abilities.


Conclusion

The best crypto trading strategies would necessitate knowing how much risk you are willing to take. You must calculate the size of your position.

Position sizing is an important concept in trading, especially when trading cryptocurrencies on the day.

To become a better crypto trader, you should use both stop-loss and take-profit orders at the same time to maximize profits while minimizing losses. Better trading tools would be required to accomplish this.

Furthermore, joining a crypto community and gaining access to all of the information you need when it comes to day trading crypto, as well as setting and planning your own trades, including entry, stop-loss, and profit-taking orders, will be a huge benefit for you.

Want to learn how to start day trading? Check out Martina’s Learn to Trade & Invest Crypto Academy platform to get access to a complete trading & investing video curriculum, trading resources, our trading community, e-mail support, and 2 Zoom lives with Martina every month. Your first month is 100% FREE!

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