Regardless of the asset you trade or invest in, the primary goal is making a profit. And if there’s no profit, minimizing loss is the next most important goal.
As a crypto investor, you need a thorough knowledge of reducing or avoiding loss. Exiting a trade at the right time when the market is not in your favor is crucial to your profitability.
Cryptocurrencies are a dynamic asset class and require severe caution when investing. It is among the most volatile assets. Risk measures, such as stop-loss and take-profit, were added to trading platforms to manage such volatility risks.
This article explains how to use stop-loss effectively when investing in cryptocurrencies. Before the how, let’s examine the what. It is essential to understand the function of this vital feature first. After that, you may feel more inclined to learn how it is used.
What is stop-loss in cryptocurrency trading?
As the name implies, stop-loss is a feature that “stops” the ongoing trade and exits the position once the trade loses a specified amount.
It is an order that tells the trading broker when you would like to exit a particular trade. Many often use it alongside a take-profit order. Both features usually come in every broker’s trading platform.
But to be sure, it is better to confirm that the broker has these features on their platforms beforehand. A stop-loss feature is a crucial tool for the crypto investor. It helps you manage the market’s volatility, safeguarding the capital and profits you previously earned.
The stop-loss order may sound very easy to use. It is if you know how to use technical indicators to analyze the market. Not everyone does. It involves looking at the chart, studying trends, deciphering trade signal reports, etc. If you are new, this can take time to master.
Effectively using it requires technical analysis. Through such analysis, you can determine all the possible points in which a price may change direction. However, experts recommend newcomers use a stop loss in all their trades. It contributes to helping you master the market and understand proper risk management.
How to Use stop-loss in cryptocurrency trading
Many brokers have a minimum stop-loss order that is allowed. The standard with most of them is 10% of your investment. If your initial trading amount is $1000, you can set the stop-loss at $900.
If the price moves against your position, the trades automatically close once the loss reaches $100. That leaves you with $900. Though you lose the 100 in this initial investment, the stop-loss may have helped you avoid losing more. Without the feature, you would keep losing if the price keeps dropping. Except you keep your eyes on the trade.
In that case, you can close and exit it as soon as possible.
Once you start making a profit from your crypto investment, effectively using the feature means adjusting the stop-loss order to safeguard your profit. The stop-loss takes effect whenever the price reaches the specified point in an unfavorable trade. The trade closes, and your capital and profit remain protected.
For example, assuming you buy BTCUSD at $19500. The price increases to $24000 in the next few days. You have made on this trade. Using the stop-loss, you can reinvest and protect your capital and a portion of the profits earned previously. This could mean setting the stop-loss at $23500. If the price declines, the trade automatically closes once it falls to this amount. And you still have $23500.
Many traders avoid setting stop-loss below support. The reason is market participants are aiming to push the price beyond that point. It is more effective to place the stop-loss slightly above instead.
Different stop-loss strategies in cryptocurrency investment
We have explained what stop-loss does and how to use it effectively for speculative investment. However, if you are holding cryptocurrency assets, there are several approaches to using stop-loss. Let’s examine them.
The partial approach allows you to specify a portion of the cryptocurrency asset that should be sold if the price drops. The goal is to retain some of the assets if the price picks up again. The risk here is that the price may continue to drop. You could be left with unwanted cryptocurrencies and incur more losses. Partial stop-loss is useful when the market has recorded several highs and lows in a given period. Technical analysis may help you determine if the price may rise again.
If you have set a full stop-loss, all the crypto assets get liquidated once the price falls to your specified amount. Full stop-loss is especially useful if the market is relatively stable. If there is a sudden move, this stop-loss protects you. The only downside is that the price can make a sudden climb like it suddenly dropped previously. If this happens, you will miss out on the profits you would have made. Analysis and thoroughly weighing all the possibilities will help you make the best decision.
Trailing is considered the best and most advanced stop-loss version. The stop-loss moves from point to point according to price fluctuations. If the crypto’s price rises, the stop-loss value rises, too, protecting the profit as it accrues. If the crypto’s price drops, the stop-loss remains static. If it drops to your specified sum, the stop-loss takes effect by liquidating the asset.
Stop-loss is a precious risk management tool in crypto trading. Fortunately, some brokers offer it for free. This tool can help you reduce or avoid loss while investing in this risky market. However, the tool is mainly designed to minimize the effects of unfavorable trade. It does not eliminate the risks. Proper market analysis and being aware of the market trend are essential. It helps you know how to approach the market and what strategies are best for the moment.