How to Use Stop Losses Effectively When Trading Cryptocurrency
A great way to preserve capital or lock in gains when trading crypto is to use stops and trailing stops. With that said, you need a solid strategy to make stops work for you and not against you.
Below we cover some basic strategy and lots of tips and tricks to ensure you get the most of out stops when trading cryptocurrency.
Understanding the example of setting stops in the image above: In the example above, one would want to buy toward the bottom of the range (illustrated by the green box). Then one would place stops below that range. “Stop 1” represents a somewhat “tight” stop right below the current range. You can see that tight stop would have been stopped out once or twice. “Stop 2” represents a “loose” stop placed below a previous range. You can see that loose stop was not stopped out at all. The looser the stop, the more risk, but the less likely it is to hit. Try reducing your position size if you are going to loosen up your stop to reduce your risk. Try moving your stops up to lock in profits as soon as a new higher range is created. Keep reading to learn about detecting ranges.
Stop Loss Basic Strategy
A basic stop loss strategy might look something like this:
- Define the current range (which is, in simple terms, where the most price action has occurred recently).
- Buy toward the bottom of the range.
- Place a stop under the current range.
- Move your stops up or use trailing stops to lock in profits as needed.
In other words, the basics are very simple. Still, there are a bunch of little details that can really help to understand. Below are some tips and tricks for placing stops.
Some Tips and Tricks For Placing Stops
Here are some stop loss and trailing stop tips:
- What is a stop? A stop loss (or just “stop”) creates either a market order or limit order when certain price conditions are hit. At its simplest, a stop places a market order when a price defined by the user is hit. Generally people use stop losses to sell if the price goes down below a certain point, but you can also use a “stop buy” to buy when a price above the current price is hit. A stop buy can be useful for buying a breakout for example. See order types.
- What is a trailing stop? A trailing stop loss is a stop that moves up as the price moves up. A trailing stop buy is a stop buy that moves down as the price moves down. Trailing stops can be very useful, but they require more skill to use than stops since your stop price will move on its own!
- Why use a stop? A stop will help you with risk management. Stop losses help you to take gains and cut losses when you can’t be by your computer to trade by hand, stop buys help you to make sure you don’t miss that perfect entry. Learn more about position sizing and risk management.
- Can I set stops using an exchange? You need an app to set trailing stops in most cases, as no major crypto exchanges allow you to set trailing stops. In fact, in some cases, you can’t even set a regular stop loss via an exchange and will have to use an app. One example of an app that lets you set stops and trailing stops is Cryptohopper.
- Where should I place my stop? Where you should place your stop differs depending on a few factors. It differs depending on your risk tolerance (how much you are willing to lose). It differs depending on what asset you are trading (the more volatile the asset, the looser your stop needs to be to avoid being “stopped out”… so one might user tighter stops on BTC than on an altcoin with a lower market cap for example). It differs depending on the chart (in the example above I defined a range and placed stops under that, I like to place my stops under the recent price action, because recent price action tends to act as support). It differs depending on if you are entering or exiting a position and what conditions you are entering or exiting under (if you think you have a perfect entry, you can use a tight stop; if you are exiting after an epic run, you might use a tight stop as well… meanwhile, if you are entering a long term position, you might use a very loose stop and add to your position where you might otherwise place a stop loss).
- What percentage should I use for a stop? The answer to this is complex, because the best place to put a stop is going to be dependent on the chart and the asset… however, the right amount of your bankroll to risk is dependent on some basic rules of risk management. So we have two conflicting things to deal with here. Good risk management might look like this: use 1% of your bankroll (the amount you have set aside for crypto) to open a position, and set your stop 2% below the current price. With that said, as noted elsewhere on this page, that stop might be too tight for the asset you are trading based off the current chart. To make sure you don’t risk too much, you can decrease the size of your position and loosen your stop. Ultimately, I think you are always better off placing your stop based on the chart and the asset, and reducing your position size to ensure you are taking on a reasonable risk (rather than vice versa).
- Using price Ranges to find entries and set stops: A good answer to the above two questions on where to place stops and how much risk one should take is “place stops based on the range, and buy toward the bottom of the range to risk as small percentage as possible.” In very simple terms, a price range is something you can see by glancing at a chart. It is roughly where the price has been trading between recent highs and lows as sideways price action occurs. You can get very specific and draw a range based on the swing high and swing low after the initial advance to the current level… but as you can see in the chart above, just simply mapping out roughly where the majority of recent price action has been seen is often more than enough to help you place reasonable stops below that recent price action.
- Buy the bottom of the range or buy a breakout: Buying the bottom of the range and setting your stops below that will help you avoid getting stopped out and will mean if you do get stopped out you will lose a smaller percentage of capital versus buying near the top of the range. Alternatively however you could buy when there is a breakout of the range and then move your stops up to lock in profits. These two moves are valid, while buying toward the top of the range and hoping for a breakout is typically a bad move.
- Your goal is to set stops and never use them when you open a position. Even though using stops is smart, your goal should be not to have them trigger. You ideally want to be entering positions wisely based on strong TA, and thus your stops should never fill. Stops are there to protect you in case you get it wrong, but the goal is to get it right. That said, no one gets it right all the time… so sometimes your stops will hit.
- You can always open another positions, but don’t chase a run. If your stop hits, you can always re-enter a position. However, you have to know when to give up. Not every coin or run is worth chasing. There will always be another play. Being stop out over and over can really eat into your bank roll, even with a good risk management strategy.
- Can I use more than one stop? You can scale into positions and out of positions using stops. To do this simply set more than one stop. Maybe your first stop gets hit and your second one doesn’t. This is called “laddering” stops.
- Is it OK not to use stops? Stops are optional, you can be a great trader and not use stops. One tactic is to put buy orders where you would place stops and average into a coin to lower your price. With that said, most great traders do use stops. Stops are a helpful tool in the very volatile crypto markets, because these markets run 24/7 and it is hard to always be near a computer to trade. If you know you would buy or sell at a certain price, a stop can help ensure you don’t miss your entry or exit.
- Try using stops to take profits. I personally almost never use stops to enter a position, instead I average into trades. I sometimes do however use stops to exit positions. When I know I want to sell, but don’t know where exactly, I might use a stop or trailing stop. That way if it runs again, I can move my stop up, but if it starts going down, I get my sell in. Timing the end of a run can be hard, stops can help. Here being stopped out means taking a little less profit than you otherwise could have got, you aren’t losing principal.
- Can I define the price I want to pay if I’m stopped out (the difference between triggers and orders placed by stops)? On some exchanges you can set the maximum you are willing to pay if your stop hits. If that price isn’t available, your stop won’t be filled. In other exchanges you can’t set the price and can experience slippage. Slippage is when you get a worse price than you want. On low volume assets slippage can be a real problem, so watch out for it. If a low volume coin gets dumped to 1 penny, and you had a stop at $10, you could end up with your asset sold at 1 penny due to slippage.
- Does it matter if it is an uptrend, downtrend, or range bound? In general stops can be looser in an uptrend or when the price is range bound, because you are assuming the price will go up eventually. The trend is your friend. If the trend is down, stops are more likely to be hit over and over. Using stops in a downtrend is tricky… and honestly, trying to trade a downtrend is generally not the best idea! In a downtrend you would generally only use stops when trying to enter for a bounce (when a coin rebounds after hitting a temporary bottom).
- Can I use stops when I’m shorting a crypto asset? Stops can be applied to both short and long positions. In fact, stops are very important when trading leveraged long positions!
- A stop loss isn’t about stopping loss or not taking a loss… It is about mitigating risk. You don’t have to use stops in a way that results in a loss. You can always scale into a position to start and then use stops later. As noted above, try moving your stops up as the price of an asset increases to lock in gains.
- Know when to skip a trade. Know when to skip a trade. If your risk tolerance is risking 2% on a trade, but you would have to place a stop that risked 10% for the trade to make sense… then consider skipping the trade or putting a limit buy order in for a lower price.
- Leave room for a run. If you can set the limit to sell at and the limit to trigger the stop, make sure to give your order enough room to go through. For example set the trigger at $1, but set the lowest price you’ll take at $0.95 cents (giving your order room to fill if the market dumps quickly).
- Be careful of trailing stops when a coin is trading in a range. Setting your stops below the current price range is often just loose enough to give your play room to run… that said, this isn’t necessarily true for a trailing stop. If you buy with a trailing stop toward the middle of a range, then it goes up above the range, then it comes back down to the bottom of the range, the trailing stop can actually end up hitting because it over your stop price up when it tested the top of the range. One thing you can do is use stops when you first enter a position, and then use trailing stops once the coin is running or later when you know you want to lock in profits during a parabolic advance but aren’t sure where to place them (because no real range has been formed yet).
That is the basics of using stops when trading crypto. Stops can be an excellent tool, but if you don’t use them correctly you can end up eroding your portfolio fairly quickly by getting stopped out over and over before your coin has a chance to run.