Crypto trading can be an exciting and potentially lucrative endeavor, but it also comes with inherent risks. One of the best ways to manage these risks is through the use of stop-loss orders. This article explores the basics of stop-loss in crypto trading, how to set a stop-loss, the benefits and limitations of using stop-loss, and more.
What is Stop-loss?
A stop-loss order is placed to sell a crypto asset (such as Bitcoin) when its price drops to a certain level. This helps to minimize the loss an investor would incur if the price of the asset were to continue to decline. The idea behind a stop-loss is to set a predetermined price at which the crypto asset will be sold automatically in order to limit potential losses. For example, if an investor bought Bitcoin at $50,000 and set a stop-loss at $45,000, the investor’s Bitcoin would be sold automatically if the price fell to $45,000.
In both cases, the order will only be executed once the security price reaches the specified level. Succinctly, a Stop-loss strategy is used to avoid more losses when the trend goes against the trade decision by automatically exiting the trade at a threshold point. It is a great option and is a personal choice for day traders to use and avoid losses after a certain price dip.
Types of Stop-loss Order
Regular Stop-loss order: A regular stop-loss order is a basic type of stop-loss that triggers a sell order when the price reaches a certain level.
Trailing Stop-loss Order: A trailing stop-loss order adjusts the stop-loss level as the price moves in favor of the trader. The stop-loss level is set at a certain percentage or dollar amount below the market price.
Break-even stop-loss order: A break-even stop-loss order is placed at the level where the trade becomes profitable, with the idea being to lock in profit and protect against a potential price decline.
Time-based Stop-loss Order: A time-based stop-loss order is a stop-loss that is set to trigger after a specified period of time, regardless of the price level.
How to set up Stop-loss Order
Setting up a stop-loss order can vary slightly depending on the cryptocurrency exchange you’re using, but here is a general step-by-step guide:
1. Choose a cryptocurrency exchange: First, you need to select a cryptocurrency exchange that supports stop-loss orders. Some popular exchanges include Binance, Coinbase, BitMEX, and Kraken.
2. Create an account: If you don’t already have an account with the exchange, you’ll need to create one. This typically involves providing your email address, and full name, and creating a password.
3. Verify your identity: Most exchanges require you to verify your identity before you can start trading. This may involve providing a government-issued ID or passport.
4. Fund your account: Once your account is verified, you’ll need to fund it with cryptocurrency or fiat currency. This can typically be done via bank transfer or credit/debit card.
5. Find the stop-loss order option: Choose the cryptocurrency you want to trade: Select the cryptocurrency you want to trade, such as BTC, ETH, or XRP.
6. Find the stop-loss order option: Once your account is funded, navigate to the trading section of the exchange and find the option to place a stop-loss order. This may be labeled as “stop-loss,” “stop-limit,” or something similar. Enter the trade details.
To set a stop-loss order, you’ll need to enter the following details:
- The type of order: Choose whether you want a stop-loss or stop-limit order.
- The size of the trade: Enter the amount of cryptocurrency you want to trade.
- The stop-loss price: Enter the price at which you want the stop-loss order to be executed.
- The take-profit price (optional): If you want to set a take-profit order as well, enter the price at which you want to sell your cryptocurrency for a profit.
7. Confirm the order: Review the details of the stop-loss order, and if everything looks correct, confirm the order.
8. Monitor your stop-loss order: Once the stop-loss order is set, you can monitor it on the exchange’s trading platform. The order will only be executed if the price of the cryptocurrency reaches the specified stop-loss price.
What is Stop Order in Binance?
The Stop Order on Binance Futures is a combination of stop-loss and take-profit orders. The system will decide if an order is a stop-loss order or a take-profit order based on the price level of the trigger price against the last price or mark price when the order is placed.
How to place a Stop Order in Binance?
Example 1:
User A places a Trigger Price order based on the Last Price by clicking on [Buy/Long].
As the Trigger Price ($8,700 USDT) is lower than the Last Price, the order will be placed as a “Take Profit Order”. You can check the order placed under [Open Order].
Example 2:
User A places a Trigger Price order based on the Mark Price by clicking on [Sell/Short].
As the Trigger Price ($8,828 USDT) is lower than the Mark Price, the order will be placed as a “Stop Market Order”. You can check the order placed under [Open Order].
Important Notes:
Binance uses Mark Price as a trigger for liquidation and to measure unrealized profit and loss.
The Mark Price is generally a few cents from the Last Price. However, the Last Price might deviate dramatically and significantly from the Mark Price during extreme price movements. Hence, please monitor the price difference between Last Price and Mark Price. You can always cancel the order you have placed and replace the order if you would like to change the Trigger from Mark Price to Last Price or vice versa.
Source: Binance FAQs
Benefits of using Stop-loss
- Risk Management: Stop-loss orders allow you to set a maximum loss limit, which helps you manage your overall risk. By controlling your losses, you can reduce the impact of negative price movements on your trading portfolio.
- Emotional Control: Crypto trading can be an emotional experience, especially during periods of high volatility. Stop-loss orders take the emotions out of trading by automating the selling process at a predetermined price.
- Preserve Capital: By setting a stop-loss, you can avoid selling at a panic-driven low price, which can help you preserve your capital. The stop-loss order will automatically sell your position when the price reaches a certain level, ensuring you don’t suffer large losses.
- Save Time: Monitoring your trades around the clock can be time-consuming, especially if you have multiple positions open. Stop-loss orders allow you to set the conditions for selling in advance, so you can focus your time and energy on other things.
- Improved Focus: With a stop-loss order in place, you can focus on your strategy and the overall market trends, rather than constantly worrying about the price of your holdings.
- Increased Flexibility: Stop-loss orders can be adjusted or removed at any time, giving you the flexibility to adapt to changing market conditions. This can be particularly useful if you need to make adjustments to your trading strategy.
- Peace of Mind: Having a stop-loss in place can give you peace of mind, knowing that your losses are limited, and your positions are protected in case of a sudden market downturn. This can help you sleep better at night, knowing that your investments are secure.
Limitations
- Slippage: Crypto markets can be highly volatile, causing stop-loss orders to be filled at prices different from the specified stop-loss level, leading to additional losses.
- Market Gaps: Crypto markets can experience sudden and large price movements, causing stop-loss orders to be triggered at a much worse price than intended due to market gaps.
- Lack of Flexibility: Stop-loss orders are inflexible and do not take into account market conditions or other changing factors, leading to missed opportunities or premature exits from positions.
- Re-entry Points: Stop-loss orders may not take into account an investor’s desired re-entry point, leading to missed opportunities to re-enter positions at more favorable prices.
Bottomline
Using stop-loss in crypto trading can be a valuable tool for managing risk and maximizing profits. It allows traders to set predetermined limits for losses, reducing the impact of market volatility on their portfolios. However, it’s important to approach stop-loss strategy with caution and thoroughly understand the mechanics of how it works before implementing it in your trading strategy. With the right approach, stop-loss can help you maintain discipline, make informed trading decisions, and increase your chances of success in the crypto markets.
