The Beginners Guide — Stop Losses
First of all, what is a stop loss?
Trading is a game of risk management, preservation of capital and planning. Due to the extremely volatile nature of cryptocurrency in particular with BTC constantly ruining alt-coin trades and setups it is important that you follow each of the 3 pillars of the trading game to be successful. Stop losses (SL, also called conditional sell orders on some exchanges) help you do exactly that, so that when you aren’t watching, or if the market moves in the opposite direction you were hoping quickly you can get out.
Simply put it is an automatic sell order that sells the amount of coins you want to sell at the price you want to sell them at. A stop loss is used as a defensive move for when the trade moves the opposite direction that you were hoping it would.
To set a stop loss on Bittrex (almost all exchanges are similar) follow these steps:
– Go to the sell section of the market you are trading
– Change the order type to “Limit”
– Change the condition to “Less than or equal to”
– Set the sell when price to the price you want to execute the sell order at
– Add a slightly higher number in “Ask” (usually 5% more is safe)
– Set the units to whatever the amount of coins you have to sell
– Press Sell
Now there are some disclaimers to make about stop losses…
Due to the extreme volatility of the cryptocurrency markets and often the numerous bots roaming exchanges it can happen that your Stop Loss triggers, but your sell orders didn’t fill. Sometimes the price drops so fast that even if you set your sell price lower than your trigger the price instantly jumps under your sell order and no one wants to buy it as it is now higher than the market price. This means it is important to set your trigger at least 5 % above your sell price but not too far because you don’t want to trigger other stop losses, especially if you are trading with volume.
Set Multiple Sell Orders
The next step is to make sure you have multiple stop losses (again more important for those of you who are trading larger volumes). There are a number of “rules” out there like: don’t set your stop losses on round numbers or exactly on the supports. No matter what you decide just be aware that you aren’t the only person to hear the rumour “don’t set your stop losses on even numbers or on support levels” and it ends up being a competition on who can place their orders high enough above these key levels to trigger first.
It is true for Bittrex and some other exchanges that they will get the best possible price for you, so if your stop loss is at 0.05 and the first buy order is at 0.06 it will sell at 0.06. This is not true for ALL exchanges so do your own research.
Setting stop losses can be an extremely important aspect of risk management and capital preservation. Just make sure you outline your plan for each and every trade before you go to the buy page and in that plan decide on the maximum amount of capital you are willing to risk on that one trade and set your stop loss accordingly.
Conditional sell orders can also be used to take profits. By simply changing the “when price is under or equal to” condition to say “when price is above or equal to” you change it from a stop loss to a take profit order.