Before we move on to understanding the best practices in managing a stop-loss order, we first need to understand what it is.
Stop-loss orders are typically placed at a price level a specified distance away from either a long or short entry level. This helps limit your risk exposure while in a trade to lock in and protect floating profits that may arise.
Trading platforms generally provide an option for placing stop-loss levels and orders can be modified even while in the midst of a trade, as long as your order hasn’t been completely filled.
Once the price gets to the stop-loss level, a market order is automatically triggered to exit the trade in either a loss or profit. A stop-loss order does not always have to end up closing a trade in a loss, but we’ll explain that further below.
[rml_read_more]
Managing your Stop-Loss Orders
Let’s refer to a recent bullish trend on the 4-hour time frame of the BTCUSD.
See bullish pressure forces the price above the bearish accumulation resistance levels on the 11, 12, 13, and 14th of June, with established support levels at 7711.0, 7923.0, 8026.0, and 8249.8 respectively.
The first order placed on June 11, had a stop-loss level set below the support level at 7679.7 USD.
As soon as the trade enters the profit zone and signals another critical support through a breakout of bearish accumulation resistance, we can move the stop-loss under the second support level slightly above the break-even point (7887.8 USD).
The movement of the stop-loss level continued up until the 5th flag, from where the price triggers the stop-loss, and we would have successfully optimized our profits at the same time as protecting the trade.
Notice how we can scale in trades in the same direction at the different breakout points.
Tailing Stops
It is an automatic tool with set rules to move a traders’ stop-loss order behind an increasing price to limit losses or better still locking in potential gains.
Setting up trailing stops is easy on MetaTrader platforms as it already comes shipped with default settings, however, most crypto brokers do not have trailing stops on their platform. If this is a strategy you wish to take, you may have to use third-party trading bots to initiate this type of functionality.
By using a trailing stop, the trader enters the number of pips, or dollar amount, he wants to trail behind – either a short or long order.
For example, let’s say you bought the BTCUSD at 3000. If the price goes to 5000USD with a trailing stop set at the dollar amount of 1000USD, then the stop-loss will be moved to 4000USD.
Although stop-loss orders are significant risk and money management tools used by traders, they will never 100% guarantee protection against loss.
Here are two scenarios where a stop loss cannot guarantee 100% safety on your trade.
Let’s say you’re using a brokerage platform that do not offer 24/7 services; there is a possibility to experience more loss than your set stop-loss level.
For instance, you set a stop-loss level at 3000USD below an entry level of 3500USD. If there is a gap over the weekend, you will not get your stop-loss filled at the 3000USD level because your trade may have exited at a lower level than your planned stop-loss. If the opening price of the gap was at 2300USD, it may have forced you to incur more losses.
The second scenario is if there is a sudden spike in the market in the opposite direction to your trade, most commonly seen in a pump and dump, the price would most likely breeze through your set level, exiting your orders in more loss than you had bargained for.
To mitigate against events such as spikes, whipsaws, and whiplashes in the crypto market, we recommend you save a higher percentage of your crypto asset in cold storage. 88.6% is quite comfortable to hold as you trade the rest on a margined account.
This strategy helps you shore up your capital from crazy spikes on a margin account within the crypto market.
Summary
In calm and stable market conditions, a stop-loss order is intended to narrow down losses on a trade.
A stop-loss order is an effective way to initiate a buy or sell market order if an initially set price level is reached.
- A stop-loss order is a set-and-forget tool that allows traders the freedom to take a break from their PC.
- As mentioned in the post, stop-loss orders have a disadvantage of spikes, where your trade can be exited, and your deal may later go in your earlier direction.
