Due to the extremely volatile nature of the crypto market, crypto trading is considered not only a profitable business, but also risky. For this reason, investors use special tools to be able to limit losses. One of these tools is a stop loss. In this article, we will take a detailed look at what a stop loss is and how to use it properly.
What is the stop loss order?
A stop loss is a type of order that acts as a limiter of trading losses due to the closure of a purchased position when the required value level has been reached. Many traders use stop loss on the exchange in order to trade successfully. You can even say that a stop loss is an insurance against losses, this is particularly important for novice traders.
A stop loss is also useful when an investor does not have time to continuously track the dynamics of quotations. It will help to limit losses in case of force majeure.
Finally, a stop loss will save the invested money if the investor misjudged the situation. For example, if a trader mistakenly estimated the chart and concluded that the price will soon begin to rise, but the price continues to fall. In this case, the stop-loss order set allows traders to save their funds.
Stop loss is an extremely useful tool for short-term trading. For example, you buy an asset at $130, and place a stop loss at $120. This means that if the price of this asset drops to $120, your trade will automatically close and you will limit your loss to $10.
How to place stop loss?
When placing a stop loss in short-term trading, the trader should analyze the support and resistance levels. Logically, the stop loss is set behind the support level. But, where? A stop loss placed just below the level is a bad idea. This stop loss can easily be knocked out by a random price movement.
For example, you have determined the support level (green line) and decided to place a stop loss immediately behind it. But after analyzing the chart, you can note that relatively recently the price broke through the identified support level, after which it increased. Thus, when placing a stop loss order, it would be more correct to place it not just behind the support level, but at some distance.
Let’s consider how to place a stop loss order on 7b. In this example, the BTC/ETH pair is selected. To place a stop loss, you need to select the “Limit” order for sale. You need to fill in three lines:
- “I want to sell” is the amount of BTC to sell (in this example, it is equal to 0.00024503 BTC);
- “By price” is the price at which the sale will be made (in this example, it is equal to 57228 USDT);
- The amount is 0.5 BTC.
Please note that if the prices of “Stop” and “Limit” are the same, then there is a risk of slippage. That is, with a sharp movement, the price can pass the level of 57228 USDT and go lower. And your stop loss will open at the same price – 57228 USDT and will remain unrealized.
Stop loss is an important tool for trading on the crypto market. This type of order allows you to reduce losses and psychological stress when trading. Therefore, it is highly recommended to study the possibilities of stop loss and apply it correctly.