Crypto Academy

Stop loss

stop loss

5 min reading

Discover how to prevent possible losses on the crypto market.

Stop loss_Risk management

Risk management (stop loss).

Introduction

Exchange crypto trading is closely connected with multiple risks. Therefore, investors have come up with different ways not to go bankrupt. Stop loss is one of them. 

What is stop loss?

There is an opportunity in the market to limit potential losses. You just set up a stop loss and the assets are sold when a certain level is reached. Such exchange orders are called stop losses. The main purpose of a stop loss is to limit the trader’s losses on each position per share. When you don’t have enough time to sit in front of your computer and monitor everything yourself, it is good to have a tool that can do it for you.

Do I need a stop loss in crypto trading?

On the one hand, traders argue that stop loss allows you to limit losses and call it one of the main risk management tools. On the other hand, crypto traders point to false positives and exit from a transaction at the most unfavorable price. If you are a newbie, a stop loss order will help you to avoid possible losses while practicing. In general, many experts consider this tool of risk management quite useful for everyone, not only for novice traders.

First of all, stop loss insures the investor against losses. It is believed that crypto trading is dangerous without using a stop loss. Stop-loss is also useful when the investor does not have time to wait around at the computer. It helps limit losses in the case of force majeure such as power outages or malfunctions on the exchange platforms.

Stop losses can also be useful in trades when the informational background itself is not enough to open a position. Then results of the technical analysis can help to create an opportunity for a good trade. Often, stop losses are not used for long-term investing based on distinct fundamental factors. Fundamental factors include macroeconomic data, operating indicators, industry trends, and others. If you are a newbie in using stop orders, it is better to stick to market orders as they are easier to set up and execute. Also, remember to check the relevance of your pending stop losses in your account.

To understand when to use stop loss, ask you the following questions:

    • What is the maximum loss I am willing to incur on this order?
    • What is the normal trading volatility of the instrument I trade in the stock market?
    • What is your trading strategy?
    • What funds are available for trading?

However, it is still necessary to limit losses in crypto trading.  Mainly, risk management is implemented at the expense of the number of funds invested in each trade. Therefore, such an instrument as stop loss is just a tool that helps you keep trading profitable. You should be confident about the money you are ready to invest in trading.

Conclusions