- The stop-loss order is a popular risk management strategy
- It is used by traders in the stock market and can also be used for cryptocurrencies
Traders use several risk management strategies while trading to minimize their losses caused due to market fluctuations. It is seen that many young and naive traders can’t decide, keeping their emotions aside, against any advice to keep a falling stock. They hope it will recover after some time, giving them profits later. However, this may not happen, and instead of closing the trade they keep on incurring more losses.
The stop-loss order is setting up a fixed price point, below which if the price falls, it automatically sells the assets and closes the trade. People may think of it as an obstacle to gaining larger profits once the market revives and rises, but professional and experienced traders still rely on it and consider it a very useful tool. The fixed price is called the stop price and it varies with people depending on their risk appetites. Apart from beginners, people who can not be available full-time to keep a continuous watch on prices and manually sell these assets, also depend on the stop-loss order.
Volatility in CryptoCurrencies
Traditional stock markets are less volatile compared to cryptocurrencies and it makes all the sense to use a stop-loss order there. The high volatility associated with cryptocurrencies can be attributed to several factors like-
Supply and Demand: The supply of cryptocurrencies are fixed, and therefore, as the total coins in circulation reach near that constant value, the price increases. There are more buyers than the supply, hence, the increased demand affects the price.
Media Hype: As new blockchains are coming now and then, promising improved features and addressing existing issues of scalability and security, they also launch their native tokens. These projects gain a lot of hype during launch with people rushing to buy and sell their tokens and make profits. However, with time this momentary hype dies causing price collapses. Celebrities and influencers also affect the prices of these tokens.
Government Regulations: Cryptocurrencies are still in their infancy and governments around the world are still trying to understand this concept of digital currency. There are many examples of frauds and hacks in the crypto sector, which involve illegitimate transfers of bitcoins to other accounts. This has resulted in many crypto-based companies going bankrupt and bank collapses. Thus, the government tries to regulate this digital economy, and often their actions can lead to high unpredictability in prices.
This price drop came on June 5, when Binance was sued by the US securities regulator.
Should You Use Stop-Loss in Bitcoin?
In crypto trading, three types of stop loss are widely used, which are-
Full Stop Loss
This instructs the broker to completely liquidate your position once the stop price is reached.
Partial Stop Loss
Here, we can choose the amount to be liquidated instead of the full amount in the previous type. This allows the trader to sell some assets, minimizing loss, while still being in trade with the remaining amount for a potential profit.
Trailing Stop Loss
Trailing stop loss is flexible as it asks you to choose a maximum loss percentage instead of a fixed price. In this way, the stop price varies with the market price and assets are liquidated only if the market crashes too low.
Setting up a stop loss for Bitcoin can be risky because of its swift price movements. Referring to the above image, the price fell significantly on June 5 but rose immediately the next day to an even higher price. By setting up a stop price, his assets would have been liquidated and he may have lost his bitcoins just because of a sneeze.
Final Thoughts
For active traders who can constantly monitor the market, it’s best to not have a stop loss order, but rather a set price in their minds which they can analyze based on the current market condition and decide whether to hold or sell.
Those who can’t keep track of the market all the time can rely on trailing stop loss which is supported by exchanges like Bitfinex, Bitstamp, OKX, Huobi, and others.