The cryptocurrency industry is rapidly growing.

  • Many participants seek to buy and sell cryptocurrencies to maximize profit, often utilizing specific price points for their sell orders.
  • Cryptocurrency values are extremely volatile, leading to significant gains or losses.
  • Trading cryptocurrencies can be lucrative but also risky.
  • A bullish trend can quickly reverse into a downtrend unexpectedly.
  • To mitigate losses, crypto traders develop strategies and use tools.
  • Stop losses and take profits are effective trading tools.
  • Stop losses can help prevent losses, especially for beginner traders.
  • The stop-loss feature is a standard tool for cryptocurrency traders, as it ensures that their orders can help mitigate losses.

What exactly is a stop-loss and how does it work?

As the name suggests, stop-loss stops the loss of your trade. A stop-loss is a trading tool used to limit the amount of loss that can be incurred when opening a trading position in the current market. The most effective trading tool you can use to protect yourself from the volatility of the cryptocurrency market and to reduce your losses while trading cryptocurrencies is the stop-loss order.

A stop-loss order allows a cryptocurrency to be bought or sold when its price reaches a certain level, known as stop price, limit price, or a stop-loss threshold. In order for a stop-loss order to work, the trader must specify the trigger price point (limit price). When the price of the crypto asset falls below the specified threshold, a stop-loss order will be triggered. This will trigger a market order, which will result in the immediate sale of the crypto asset at the best available price.

Let’s say, for example, you opened a long position in bitcoin with 100 USD and you set a stop-loss for 10% below the price, which is 90 USD. If the price of bitcoin falls below 90 USD at any point in the future, the stop-loss order becomes triggered and the position is sold at the lowest price available below 90 USD.

Although the primary goal of a stop-loss is to prevent trades from incurring more losses, it may function as a stop order in a volatile market. The following are the most common forms of stop-loss orders.

Full (Complete)

A full stop-loss will liquidate the entire position when the limit price reaches the stop-loss threshold. Closing the entire position removes the likelihood that the trade will continue to decline. It is advisable to use this form of stop-loss when trading cryptocurrencies with larger market cap rather than small ones, as the spike in price will cause traders to miss out on potential profits in the event of a correction.

Partial (Limited)

This type of stop-loss closes a portion of a trade once activated. This is especially advantageous when trading highly volatile cryptocurrencies, as traders can still hold on to a portion of their trades to maximize the profits in the event of a price spike.

Trailing

This type of stop-loss uses a distance chosen by the trader to change the limit price in response to the rise in the value of the crypto asset, effectively creating a stop-limit order. If the price rises, the tracking distance will cause the stop-loss value to increase as well, thereby adjusting your stop-limit order to the current market price.

Why should you use a stop-loss when trading cryptocurrencies?

Stop-losses and take-profits are among the most effective trading tools, and there are several reasons why you should always use a stop-loss order when trading in the volatile market of cryptocurrency.

Due to the extreme volatility of the current market conditions. cryptocurrency market, it can be challenging to control the risks associated with crypto trading. For this reason, experienced and beginner traders are always advised to use a stop-loss order on every trade to limit the maximum loss they may incur. If traders do not use stop-loss orders, they have a greater chance of losing a large portion of their trading profits, if not their whole portfolio.

Stop-loss also helps in strategy formulation and decision making. When traders use stop-loss orders, they can calculate how much they are risking versus how much they could gain , regardless of the position size. Traders who use stop-loss orders are also more likely to maintain control over their emotions while their trades are running, which is especially important when they are absent from their devices and unable to monitor trades.

The trailing stop-loss can also be used for capturing profit when a trade is favorable. An increase in the price of a cryptocurrency will also increase the value of the stop loss, especially when using a trailing stop. As a result, traders can secure any advantage they gained from the previous price movement in their favor by using the current market price.

How to calculate stop-loss for cryptocurrency trading

The placement of your stop-loss is primarily determined by how much of your entire portfolio you are prepared to risk; however, as a general guideline, traders are recommended not to risk more than 2% of their total capital on each trade.

Consider the following scenario: Bitcoin is now trading at $10,000, and you wish to take a long position on 1BTC. To minimize risk, you don’t want to lose more than 5% of your capital. You can use a stop loss to do this.

5% of $10,000 is $500, which could be the maximum loss you are willing to incur on a stop loss order or a trailing stop. This means you would place your stop-loss at $9500 or 500 points below the entry point. In most cases, crypto price movements are in dollars; therefore, a rise from a price of $10 to $11 for a cryptocurrency would indicate that the cryptocurrency has moved one point in value, affecting your stop limit. If the price of BTC falls below $9,500, the stop-loss would be triggered and the crypto will be sold at the next available price below $9,500.

How to set stop-loss and take-profit targets on Margex

Despite having one of the simplest user interfaces in the industry, Margex offers a wide range of advanced trading tools and instruments, and setting stop-loss and take-profit targets is a simple and straightforward procedure, even for someone who has never done this before. Below are the steps to follow in order to set stop-loss and take-profit targets on Margex, ensuring that you understand the type of order you are placing.

Step 1: Create an account
The first thing you have to do is to open a Margex account. To begin trading, go to Margex.com and click on the “Start Trading” button. You will be directed to a sign-up page where you will need to provide simple information such as an email and a password to continue.

Step 2: Make a deposit to ensure you have sufficient capital for your limit order.

Secondly, to start trading, you will need to make a deposit into your account.. To make a deposit, go to the “Wallet page” and click on “+Deposit.”

You have two options available to make a deposit, which can be used to fund your orders to buy cryptocurrency. You can either make a direct deposit of BTC and other cryptocurrencies available by transferring from another wallet to your Margex account wallet, or you can click “Buy Bitcoin” and use the direct integrations of Changelly or ChangeNow to purchase cryptos if you don’t already have cryptocurrency.

Step 3: Start Trading

Once you have made a successful deposit, go to the “Trade” page to start trading in real time. To set up a TP/SL order, go to the trade for which you will place a protective order in the “Open Positions” window and click on the dotted line under Take Profit/Stop Loss. Once clicked, a pop-up window will appear that will allow you to manually enter the TP/SL price or by RoE (Return on Equity) percentage, helping you to optimize your order type to limit potential losses.

Best strategies for using stop-loss in crypto trading

Place stop-loss at major support or resistance levels

It is generally recommended to use significant support and resistance levels as your stop-loss markers when trading, as these levels can indicate the best order type to use. This can be achieved by thoroughly evaluating the current state of the cryptocurrency market and performing sufficient fundamental and technical research, including understanding different order types. This will help you to determine the next support or resistance zone, which is crucial for setting the specific price for your trades.

Combine take-profits and stop-losses to create a balanced trading approach that incorporates various order types.

Take-profits and stop-losses complement each other. This is why a lot of smart traders use them right after opening trades to set a stop and limit potential losses. Combining take-profit and stop-loss orders allows you to spread the risk associated with trading, increasing the likelihood of making profits.

Adjust your stop-loss to protect your profits

Another strategy to keep in mind is to move your stop-loss when the market begins to move in your favor and you’re making a profit on your trades. The movement can be controlled manually or with the help of a trailing stop-loss. Manually adjusting the stop-loss order enables you to time the movement.

Set your stop-loss according to your profit target and ensure it aligns with your order type.

The objective of every trader is to make a higher profit than the possible loss; therefore , you should do your calculations and place your stop-loss based on how much you are willing to risk versus how much you anticipate to profit.

Conclusion

Stop-loss orders are one of the most important trading tools available to all traders, and when used correctly, can provide significant advantages. As a serious trader, you should always put your stop-loss first when putting together a trading strategy.

Stop-losses are an important aspect of any trading strategy to limit potential losses. risk management. Before using stop-losses in crypto trading, however, you should be fully familiar with the way they operate and how they can be managed effectively, because the success of your trading depends on your ability to manage risks. It is also important to evaluate the risk-to-reward ratio when setting a stop-loss.

FAQ

What is a stop-loss with example?

A stop-loss is a type of order designed to limit potential losses on a trade by automatically triggering a sell order when the price of a stock reaches a specific stop price. For instance, if you buy shares at $50 and want to limit your losses, you could set a stop-loss order at $45. If the stock price drops to $45, the stop-loss order is triggered, converting to a market order to sell at the best available price. This helps traders manage risk, especially in volatile markets, by ensuring that losses are capped. Additionally, traders can use stop-limit orders to set a stop price while also specifying a limit price, allowing for more control over the selling price once the stop price is reached.

What does loss stop mean?

A stop-loss order is an instruction to buy or sell a stock when it reaches a specified price, known as the stop price. This type of order is designed to limit your losses by automatically executing a market order when the price of the stock falls to the stop price. For example, if you want to limit your loss to 10 per share, you could set a stop-loss order to sell at a price below the current market. Alternatively, you could set a stop-limit order, which becomes a limit order once the stop price is reached, allowing you to maintain control over the price at which you sell. Stop-loss orders allow traders to manage risk by ensuring that they exit a position if the price drops significantly, and can differ from a buy limit order or a sell limit order, which have different execution criteria.

Why are stop losses a bad idea?

Stop losses, particularly in volatile market conditions, can sometimes be perceived as a bad idea because they may lead to premature selling. When the price of the stock drops slightly but then rebounds, a stop-loss order is triggered, resulting in an unnecessary loss. This can limit potential gains if the price moves back up after hitting the stop price. Additionally, in a rapidly changing market, a stop-loss order may become a market order, executing at a price significantly different from the stop price set by the investor. To mitigate losses effectively, traders may consider using a stop-limit order or a trailing stop, which allows for more control over the execution price. Understanding how stop-loss orders operate and their implications can help investors make informed decisions about when to place an order to buy or sell a stock.

What is the 7% stop-loss rule?

The 7% stop-loss rule is a risk management strategy used by traders to limit potential losses on their investments. By setting a stop-loss order at 7% below the purchase price, investors ensure that if the price of the stock drops and reaches this specific price, the order is triggered, converting to a market order to sell. This order helps to limit losses and protect capital in volatile market conditions. Using stop-loss orders, traders can maintain control over their investments and set boundaries for maximum acceptable loss, ensuring that their order will only execute when necessary to safeguard their portfolio.

Do stop losses always work?

Understanding how stop-loss orders function is crucial for managing investments effectively. A stop-loss order is a trading instruction that allows an investor to limit potential losses by setting a specific price at which an order to sell will be triggered. When the price of the stock drops to this stop price, the order becomes a market order, helping to ensure that losses are minimized. However, in a volatile market, there is a possibility that the order may not execute at the exact stop price, especially if the market moves rapidly. Therefore, while stop-loss orders can help limit losses, they are not foolproof and depend on current market conditions and the types of orders used, such as stop-limit orders or market orders. It’s essential to assess market movement and set a stop that aligns with your investment strategy to effectively manage risk.