Being able to reduce loss is one of the most crucial skills a crypto trader should possess. Trading entails losses that cannot be avoided due to the market’s volatility nonetheless, with due diligence and carefully done homework, some losses could be avoided or minimized.
Crypto trading loss can be heartbreaking, especially when you lack adequate knowledge about it. That is why it is very important to understand some laws and trading terminologies. Knowing when to exit a losing trade at a certain point is one approach to avoid loss in trading.
To reduce risk and avert a potentially disastrous loss; traders are strongly advised to always use the stop-loss order technique anytime they place a trade. Stop-loss orders reduce the risk associated with trading by capping the amount of money at stake on any one trade.
What is a Stop-loss Order?
Stop loss order is a trading technique employed to control losses and lessen risk exposure. When an investor doesn’t want to feel under pressure to constantly monitor a particular trade, they utilize it.
Setting stop-losses is the one trading tool you absolutely must use to be successful in the cryptocurrency market. In order to have a profitable experience when trading digital currencies, you need to prevent significant losses because of the volatility in trades.
With the implementation of a stop-loss order, a trader declares that if the price of the investment rises to a particular level that corresponds to a specific amount of loss in the transaction, the trader should leave the trade. This helps the trader to limit the risk in the trade to a specific amount if the market goes against him/her.
Terms associated with Stop loss
- Stop price: The stop-limit order is executed to purchase or sell at the limit price or better when the current price hits the specified stop price.
- Limit price: The cost (or sometimes a lower one) at which the stop-limit order is carried out.
- Quantity:The amount to buy or sell according to the stop-limit order.
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How to use stop loss
Once a trade is making a decent profit, the trader may frequently move the stop-loss order to protect some of the gains. Once the price falls below the predefined exit point, the stop loss order becomes an instant order and gets executed.
Setting a stop loss on a trade is simply to reduce the amount of loss.
Let’s say a trader buys BTC/USDT at the current market price of $21,000. The price then rises to $22,000 for 1 $BTC, and the trader wants to protect themselves from potential losses. They may set a stop loss at $21,500, which will protect half of their current profit in case the market declines.
Setting your stop loss at the market structure (just below support) is not recommended because you are at risk of being quickly hunted. Give your stop loss some “gap” away from the market structure as an alternative.
Stop-loss orders shouldn’t be set up at just any point. The best position for a stop-loss allows for some variation while yet allowing you to exit your transaction if the market moves against you.
Stop-loss orders are an essential tool for traders to manage their money, but they do not offer a 100% guarantee against loss. Even if the opening price is well below the designated stop-loss level, the order will be filled close to it.
Final Thoughts
You must be well familiar with the processes involved and how to utilize stop-loss effectively before using it in crypto trading. We hope that by this article, you at least have a rudimentary understanding of how stop-loss in cryptocurrency trading works.
Profits are a top priority for all traders, so it’s critical to have the right expertise before using these trading strategies. If this technique is used effectively, it can help you avoid spending a lot of time in front of your computer while also preventing a lot of losses, which will ultimately increase your profit.
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