DISCLAIMER: This is not financial advice; the article is for educational purposes only.
"Every battle is won or lost before it ever fought." - Sun Tzu
Every trade is a battle and winning battles require preparation. Since uncertainty is the only thing that’s certain about the markets, you should learn to identify the possible scenarios and prepare contingencies for them.
What is a stop-loss order?
A stop-loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price. - Investopedia
This type of order is designed to limit the risk of losing a cryptocurrency's position. For example, setting a stop-loss at 5% below the price at which you bought the stock will limit your loss to 5%.
Market Orders
Stop-loss orders are usually "market orders," meaning they will take whatever price is available after the price reaches tp your stop-loss price. If no one buys your shares at that price, you may get a lower price. Slippage rarely occurs while trading high-volume equities, currencies, or futures contracts.
Limit Orders
Stop-loss limit orders are another form.
Your broker automatically sends a limit order to close the position at the stop-loss price or better when an asset's price hits it. Stop-loss limit orders close trades only at the stop-loss price or better, unlike stop-loss market orders. This eliminates slippage (which is rarely a problem) but creates a bigger one: it doesn't get you out of the trade when the price is moving aggressively against you.
Advantages of stop-loss order
- Minimize losses
- Balance risk and reward
- A free insurance policy as it costs nothing to place a stop-loss order
- You don't need to keep watching the market to take action
- Help insulate your decision-making from emotional influences
Disadvantages of stop-loss order
- Stop price might be triggered by short-term price fluctuation
- Once the stop price is activated, your order will become a market or limit order.
- In the case of the stop market order, your matched price might be far different from the stop price. This is especially true in the cryptocurrency landscape where the market is moving fast.
- With a stop-limit order, there might be a possibility that your order will not be executed. This can harm investors during a fast market if the stop order triggers, but the limit order does not get filled before the market price blasts through the limit price.
Define your stop-loss strategy
The key is picking a stop-loss percentage that allows a cryptocurrency to fluctuate day-to-day, while also preventing as much downside risk as possible. Setting a 5% stop-loss order on a stock that has a history of fluctuating 10% or more in a week may not be the best strategy. You'll most likely just lose money on the transaction fee generated from the execution of your stop-loss order.
How to Place Your Stop Loss Orders
Stop-loss orders are placed like other orders. Select "buy" or "sell." Your order ticket may default to a "market" order type. Brokers may vary. Change "Market" to "Stop." Select your stop price and place the order.
If you're a discretionary trader, think about why you're setting your stop-loss order at a certain price. If you don't know, it's not a smart stop loss. Discretionary stop-loss orders must be market-based to protect trading capital (which is the point of a stop-loss order).
If you're a System trader, then you must have test results that show where to put stop-loss orders and follow them. If you don't have test findings or don't follow them, you're adding risk to your trading, which is the opposite of a stop loss.
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