It’s essential that you use a stop loss when trading crypto. It would be best if you used a stop loss when trading any financial instrument. Still, crypto is extraordinarily volatile, and therefore you need to ensure that any time you’re mistaken, it will only cost you a small percentage of your account.
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WHAT IS A STOP LOSS?
A stop loss in crypto trading is an order that tells the broker when you no longer wish to be involved in the market. You set a stop loss value at a specific price, and when that price gets triggered, the broker will exit the trade
E.g I bought 1 unit of $ETH at $2500 and did not want to lose more than $200 if things didn’t go my way so I placed a stop loss at $2300.
So, when the price of $ETH fell below $2300, I only lost $200 compared to what I’d have lost at the current price of $1636 if I held my $ETH with no stop loss.
A stop loss helps you control your losses in case prices do not go your way.
TYPES OF STOP LOSSES & WHICH SHOULD YOU USE?
A market stop-loss guarantees execution of your order once Price gets to your stop-loss order price.
A limit stop-loss only guarantees that the price you chose is exactly where it sells.
To clarify, a market stop loss set at $2300 will make sure when price gets to $2300, it sells at whatever available price depending on your exchange. It could sell at $2299, $2297, $2295 etc.
When using a market stop loss, the difference between your stop-loss order price and where it eventually sells is called SLIPPAGE. The higher the slippage, the higher your expected actual loss. E.g if my eventual loss is $220, slippage cost me $20 extra.
This is why you need a good exchange with low slippages as an investor or trader to make your losses less as every dollar counts for you. Low slippage means even when the market is highly volatile, my loss could be just the $200 I planned for with a market stop loss or close to $200.
Also Read: When Should I Use Crypto Loans
A market stop loss is more suitable for traders especially scalpers/day traders because when the market becomes very volatile, you can get liquidated if you don’t use a market stop loss. Never use a limit-stop loss as a day trader.
A limit stop-loss might be more suitable for some investors because they have no liquidation risk but some exchanges are unreliable with stop losses so, you might still wanna go for a market stop loss as an investor so you don’t have to keep checking if your order was executed.
As a trader, you now know why you sometimes lose more than you planned for even after setting a stop loss or even get liquidated. My advice is to go for an exchange that has low slippages. Ask other traders you know for reviews and verify what people say about using an exchange.