A digital or virtual currency, distributed across a large number of computers through blockchain technology, is called Cryptocurrency. While one can mine for cryptocurrencies through computers, another way to get involved in the world of cryptocurrencies is by trading them in the secondary markets. Like in FOREX, one can trade cryptocurrencies by speculating the price movement through a CFD account or by selling and buying the underlying coin via trading. Due to the decentralizing nature of the cryptocurrency market, they are neither issued nor backed by any central government authority.
Trading in Cryptocurrency
Trading in cryptocurrency requires some basic knowledge of chart reading and technical analysis to start with. You can buy and sell cryptocurrencies like Bitcoin in the secondary market where you can either buy the cryptocurrency at a lower price and sell at a higher price or sell the currency first at a higher price only to buy it again at a lower price. Multiple online trading platforms facilitate trading in cryptocurrencies offering trading console and chart support.
The inherent risk in trading any type of security in the secondary market is the prospect of wiping up your entire capital if the prices start going in the opposite direction than what you had predicted.
This can seriously damage your account and your morale at the same time. The biggest help, and maybe the only one, that you will ever find in the merciless secondary market is from the discipline to put stop losses on your trades. In this article, we will understand what stop losses are and how to use them while trading cryptocurrencies.
What is Stop Loss?
Crypto trading is an extremely volatile instrument where a short-term fluctuation can easily trigger a huge loss or gain. In such conditions, it is important to take caution in order to limit the maximum loss of a trade by automatically liquidating assets once the market price reaches a specified value.
The tool used by traders to provide a cushion by placing a specific price that automatically will execute a buy or sell at a certain price point is known as Stop loss.
While stop-loss has major advantages like keeping a check on your losses and monitoring multiple deals at the same time, freedom to cap the money you are willing to risk and many more, some experienced traders prefer to play the trading field without any stop-loss restrictions as stop-loss acts as a hindrance in trading.
Types of Stop Losses
Based on the capital you are trading, trade you are making, whether it is long trade or short trade, stop losses can be of various types. Some of them are as enlisted below:
As the name suggests, this lead liquidates all your crypto assets once the price reaches its threshold and the stop loss is triggered. This stop loss is mostly useful in a stable market where chances of sudden price fluctuations are very common. The full stop loss while prevents sudden loss due to price drop, it also causes the trader to lose out on potential profit which is likely if the prices surge back up. Thus, before setting a full stop loss, one must consider both the risk as well as the rewards that may accompany it.
Partial Stop Loss
For volatile markets like that of cryptocurrency, partial stop loss is one of the most common types used. This ensures that only a specified proportion of the crypto assets are liquidated when triggered, securing some profits from the remaining assets, if the price surges after the drop. This can also leave the trader with some unwanted assets which can bring him great loss if the price remains low.
While some traders believe it to be very beneficial, the argument regarding the high risk in partial stop loss cannot be ignored.
A middle ground between the two, the trailing stop loss causes the stop loss value to adjust according to the price fluctuations of the cryptocurrency. The trader sets a trailing distance, i.e. distance between stop loss value and current asset price. The stop loss value rises with the increasing price of cryptocurrency, and when the prices begin to fall, the stop value stays constant and when the stated value is reached, stop-loss order is triggered liquidating the crypto assets.
This helps the trader in defining the maximum loss cap and frees the trader from manually adjusting the stop loss based on the market trends. However, it can also become a liability in a market experiencing a steady rise, as the trend has shown that before a crypt asset begins to grow, it often drops. This can result in the asset being triggered for liquidation even before the price has reached its upper limit.
Each chart you study for crypto trading is different, while some can see wild fluctuations, others may have more consistent and stable support. Thus, it is necessary that you first analyze your trade and then take the call of choosing stop loss or not.