When it comes to managing risk, stop loss is something you should never avoid using.
Before opening a position, you should predefine the stop loss area.
Once you open a trade, stop loss has to be placed automatically afterward.
To limit risk on a trade, you need an exit plan. When a trade goes against you, a stop-loss order is part of your exit plan. A stop loss is an offsetting order which exits your trade if a certain price level is reached.
By using stop loss, you are deciding how much are you going to lose once you are wrong.
You don’t let the market to determine how much are you going to lose because it doesn’t care about you. Sooner or later, the market will take more than you can afford to lose.
Stop loss is a simple order that will be executed once the price reaches stop loss trigger price.
It should be placed at the place where your setup would be invalidated and confirmed that you were wrong.
As we are starting to educate you about trading, this is the first big lesson.
Never enter the trade without a stop loss.
There are two types of stop loss orders: limit and market stop loss.
What is the limit stop loss?
The limit stop loss is the type of stop loss that will be executed at the price you predefine.
If you buy a coin, you will put stop loss below some important support area.
It will be a sell order because you bought a coin and once the price reaches the area that will invalidate your previous setup, you have to sell it and avoid losing more.
As you are putting sell order, there should be an interested buyer at that price for your stop loss order to be executed.
However, if there are no buyers at that price, your stop loss won’t be filled, which is equal to not having stop loss placed.
What is market stop loss?
The market stop loss will be triggered at the price you predefine.
However, it will be filled at any price until the position is fully closed.
Let’s say you bought a coin at $100, and you put stop loss at $90.
If you use limit stop loss, the stop loss will be filled only if there is someone interested to buy at $90.
On the other side, if you use market stop loss, if there are no buyers at $90, it will be executed if there is a buyer at $89, or $88.
We friendly advice using market stop loss because it is better to lose a little bit more by lower execution than to be without stop loss and risk losing much more.
What is slippage?
The difference between the price you put your stop loss at and the price at which it gets filled is called slippage.
If you put stop loss at $90 and it gets filled at $88, the slippage was $2.
The slippage is high if there are not enough buyers or sellers.
We also call it a lack of liquidity in the market.
When we have high liquidity (a lot of buyers or sellers), the slippage is lower. If the liquidity is low (not enough buyers and sellers), the slippage is high.
That’s why it is better to trade liquid market because you won’t get slipped as you would get by trading illiquid ones.
Stop-loss orders are designed to limit a traders’ loss on a position.
Although most traders associate a stop-loss order with a long position, it can also protect a short position, in which case the coin gets bought if it trades above a defined price.
Using stop losses on a regular basis is essential and it forces the trader to be disciplined in getting out of losing trades.
At the minimum, a worst-case stop loss should always be used.
Never have an opened position without a stop loss order.
Milos is an independent trader, with a background in journalism and publishing. Nomadic by nature, he’s lived in four different countries this decade. He’s fascinated by Blockchain technologies’ potential to reshape all aspects of our lives. Milos got into Bitcoin while completing his degree and hasn’t looked back since, writing about anything crypto-related. He is the co-founder of the Cryptoaims and he has a strong passion to educate people about this revolutionary technology.