How to Use Stop Loss Order as a Crypto Trading Strategy

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Stop loss order is an important crypto trading strategy for mitigating losses and maximizing profits. However, you need to know when to use stop loss orders to maximize gains. Otherwise, you end up with missed profits or being stopped out too early.

Let’s see how this works in practice.

What is A Stop Loss Order?

A stop loss helps you limit potential losses on a trade. Traders place a stop loss order as an instruction to buy or sell an asset when its price hits a predefined level. If it is a long position, the stop loss triggers a sell order if the price falls to the stop level. Likewise, for short positions, the stop loss triggers a buy order if the price rises to the stop level.

In short, the stop loss converts to a market order when triggered to close out the position.

As you can see, a stop loss order acts as a cushion against risk in order to maximize returns. If used correctly, traders can define the maximum loss they’re willing to risk on a trade. For example, traders going long can raise their stop level to lock in gains as the price climbs up. Meanwhile, Short sellers can lower their stop level to secure profits if the price drops down.

Advantages of stop loss order

If you don’t use stop loss orders on your trades, then your open position can get out of control. Here are some of the advantages of using a stop loss order.

• It helps minimize the risk of potential losses on a trade
• It makes your trading easier as it automatically executes a trade if the defined price point condition is met
• It is a better risk management tool as it allows you to determine the amount of money you can risks on a trade

Disadvantages of a stop loss order

The main downside of a stop loss order is that it does not guarantee execution at that exact level. So, price gaps and market volatility can lead to execution at unfavorable levels sometimes.

Types of Stop Loss Orders

1. Market order

A market order allows you to buy or sell cryptocurrency immediately once the order conditions are met. It’s usually executed at or near the ask or current price. I must point out that a market order only ensures that it will be executed immediately, but the price of the asset isn’t guaranteed.

2 Limit order

With a limit order, your trading bot will sell or buy a cryptocurrency asset when it reaches a specified price or higher. You can set a sell limit order or a buy limit order. The bot will execute a sell limit order if the price of the asset reaches a specific level or goes even higher. Similarly, it will execute a buy limit order when the price of the cryptocurrency drops to a specific level or even lower.

For example, if you want to buy BTC for no more than $46500. It means your buy limit order will be executed automatically if the price drops to $46500 or lower.

A stop loss order can also be based on:

• Trading pattern or price channel
• Volatility
• Pips/ percentages

Stop loss order based on a trading pattern or price channel

This is placed such that when the price goes beyond the pattern or channel, the price will continue to move in the unprofitable direction. Therefore, the trader is better off closing their position.

Stop loss based on volatility

This stop loss order allows the trader to register a loss and exit their position due to sharp rise in the volatility of the crypto asset.

Stop loss on pips or percentages

This implies that the trade will be closed if the price moves towards a loss by a specific number of pips or percent. Crypto day traders use this strategy quite often to mitigate losses and manage risks.

Trailing loss stop order

This order is placed at a specific distance (measured in pips) from the opening price of a position. It dynamically adjusts (trails) alongside the price, shifting as the price moves towards profit.

If the price reverses, the trailing stop-loss order is not shifted, and the trade is closed with a profit.

What is the Difference Between Stop Loss and Stop Limit Order?

A stop loss order ensures the execution of the order, while a stop-limit order ensures the price at which the order will be executed. That’s the main difference between the two.

When triggered, the Stop Limit order converts to a limit order. This means it will only execute at the specified limit price or better. So, the order may not be filled if the price gaps and skips past the limit price before the order can be executed. This could leave you exposed to further losses.

In addition, volatility in the market can result in liquidity evaporating quickly, making it impossible to get the order fully filled at the limit price. In such situations, only one part of the order is filled as the price moves away from the limit price.

How to Set Up Stop Loss Order

For cryptocurrency trading, use resistance levels and technical support to place stop loss orders. If you want to go long on a crypto trading pair, you can define the value of your stop-loss order slightly below the next technical support level. On the other hand, if you want to go short, then you can set your stop-loss order's value slightly above the upcoming resistance level.

It is crucial to monitor and adjust your position. Keep an eye on the market and be prepared to adjust your stop loss orders if the market conditions change. While stop loss orders can help manage risk, they are not foolproof, and market conditions can sometimes lead to slippage. So, you must always consider that possibility.

Best Crypto Trading Bots

Regardless of your trading strategy, selecting the right crypto trading bot is most important in achieving success. Not only do these tools offer a great online trading environment, but they also offer great features for creating stop loss orders.

Traders can program these bots to automatically place stop loss orders based on specific price levels or percentage movements. This automation ensures the timely execution of stop loss orders without the need for constant manual monitoring.

If you’re looking for an online automated bot for crypto futures trading, then Refonte Infini can serve you greatly. It’s also one of the top-rated online trading bot marketplaces that you can use to improve your trading experience.