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When it comes to a market as volatile as cryptocurrency, the hardest part is to mitigate your losses. Especially with the recent crash that Bitcoin has experienced, many novice investors have quickly learned the importance of controlling lossesâââsome may have, unfortunately, had to learn it the hard way. Even in the recent market, Bitcoin has been struggling to break past $12,000, frequently correcting back below $10,000.
The past few months have been quite a roller coaster for Bitcoin (source:Â CoinLib)
Fortunately, thereâs a solution to tell an exchange such as GDAX (owned by Coinbase), Bittrex, or Binance to automatically sell at a certain price or below. For those of you unfamiliar with trading, itâs called a Stop Loss. For those of you looking for a more technical definition, Investopedia sums it up pretty well:
A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. Stop loss orders are designed to limit an investorâs loss on a position in a security. Although most investors associate a stop-loss order with a long position, it can also protect a short position, in which case the security gets bought if it trades above a defined price.
Stop losses are great, and can assist in a variety of ways including:
- Preserving your money: preventing loss of any of your initial investment by automatically liquidating (cashing out) immediately when the price drops back down to your buy-in price (or a little above your buy-in price if you want to consider the transaction fee costs, too).
- Preventing a bad situation from turning worse: keeping you from losing more money than you feel comfortable with losing; i.e., giving yourself some wiggle room while you wait for your investment to, hopefully, grow.
- Making at least some profit: guaranteeing profits while you wait for the candlestick to grow even bigger (the green candlestick, of course). If you donât know what a candlestick is, check out my article on 0 to Pro Crypto Trader to learn all about it.
Using a good stop loss strategy can make you look as cool as the guy sipping his scotch in that GIF (how do I know itâs scotch? All cool guys who know how to set stop losses drink scotch). Yes, there is strategy behind the stop loss.
Sure, noobs will just bang the keyboard and hope their money is still there tomorrow, but no, not youâââyouâre ready to make some smooth love to the charts. So hereâs some sexy stop-loss techniques that can definitely make you the talk of the table.
Before We BeginâŠ
One of the things you might be wondering is what the ârightâ stop loss price is. While there is no sure-fire answer to that, take a look at my piece on Technical Analysis, which discusses a methodical approach by which Technical Analysts like Xander, Chivashon and FinanceFox (Technical Analysts in Cosmic Trading, a Cryptocurrency Forum) make predictions for prices:
The Art of Cryptocurrency Price Predictions and Technical Analysis
Long story short (in case you didnât read the article), Technical analysis (TA) is a trading strategy that has been traditional used in stock market trading for high-frequency traders, hedge funds, brokers, and individually; basically, lots of people use TA to study pricing patterns and try to make predictions about psychological behavior. When you see charts like the one below, itâs done using TA:
So yea, join our cryptocurrency community at Cosmic Trading to talk more about TA! Itâs free to join and chat with community members.
The Full Stop Loss
This is the most generic kind of stop loss. Itâs what people think of when they see the stop loss button. This strategy is black-or-whiteâââyou either wake up with your bitcoins (or altcoins) or you donât.
For example, Billy has 1 BTC and is worried that bitcoin will fall below $9,000 while heâs asleep. So he sets a stop loss rule that tells the exchange to automatically sell his 1 BTC if price drops below $9,000. The advantage of this is that if the price does, indeed, drop below $9,000 and stays there, Billy has just saved himself from losing more than he intended to and can buy back in at a lower price.
The disadvantage, though, is that it leaves him completely exposed to the possibility that BTC could rise above $9,000 again before he wakes up. Therefore, he would have to buy back in at a price above $9,000, meaning he has suffered a loss.
Partial Stop Loss
So Billy starts thinking about how to defend against the disadvantage present in the full stop loss. While there isnât a perfect answer, the partial stop loss is a compromise. Still a black-and-white solution, with a partial stop loss, Billy would set a rule that only, perhaps, 50% of his holdings get sold if the price drops below $9,000.
If the price rises above $9,000âââletâs say, to $10,000âââthen at least he still has half his BTC to take advantage of the higher price, and he then has more flexibility to make his next move. One possibility is that he could immediately buy back in, which would result in less of a loss than if he immediately bought back in through the Full Stop Loss strategy. Another possibility is that he can sell the remaining 0.5 if he believes the price will drop back down, and then buy in again at a lower price. To any extent, if he employs the Partial Stop Loss strategy and the price moves back up, he would have come out ahead compared to the Full Stop Loss.
The disadvantage, though, is that if BTC falls below $9,000 and stays below $9,000, then Billy would have only liquidated half his holdings. If he then sells the remainder of his shares below $9,000, then it would be a heavier loss compared to the Full Stop Loss.
Trailing Stop Loss
Alright; by now, Billyâs on the Limitless drug and his creativity has reached a new record-breaking high, unlike Bitcoin, which is potentially going to crash again soon so he really needs to start thinking.
One of the problems of the Partial Stop Loss (or even the Full Stop Loss) is figuring out where to set the trigger. For example, letâs say the current price of Bitcoin is $10,000. Billy thinks itâll go down to $8,500. He decides to set a stop loss at $9,200. This way, if it hits $8,500 in the morning, he can buy back in for 1 BTC at $8,500 again and pocket the remaining $700 (or buy more BTC with itâââletâs face it, thatâs what Billy would do because Billy is you and me and we arenât self-control prodigies).
But if the price only goes down to $9,000, then setting the stop loss at $9,200 wouldâve been a bit low and he would have missed out on taking advantage of a larger spread (in this case, the spread is defined as the difference between the price you sold and the current price).
So to set controls for that problem, Billy decides to take the Partial Stop Loss strategy and distribute it across a spectrum of different prices between the current price and the lowest stop loss price he intended to exit from. By this time, people only know him as Bill.
In this way, hitting each stop loss would help with dollar cost averaging his exit; for those of you unfamiliar with dollar cost averaging, it is a strategy where you take out money little by little between a certain price and your intended exit price, in an effort to increase the average price you exited at.
For example, look at the same scenario, letâs say Bitcoin is $10,000, and Billy thinks itâll go down to $8,500. But heâs unsure, so he would rather play it more conservatively on the chance that it either jumps back up or doesnât go all the way down to that price. In a very basic scenario, instead of setting a single stop loss trigger at $9,000, he might set a stop loss trigger to sell 0.2 BTC at $9,800. Then another 0.2 at $9,600. Then another at $9,400⊠and $9,200⊠and $9,000. This way, his average exit price would be $9,400 instead of $9,000. If it hits only $9,000, he would still make $400 off the spread, instead of $200 from the previous example of only setting a single stop loss.
Which One Should IÂ Use?
All programmers will know this answer too well: it depends.
With each of the three stop loss strategies, the advantages and disadvantages were described only as it fit with the example scenarios. The reality is, there could be several arguments made about the strengths and weaknesses of each strategy that are not included in this article.
At the end of the day, though, the strategy you should deploy when trying to swing trade or short the bear market (both are very risky strategies) depends on your confidence around the potential prices of Bitcoin in the near future.
Resources to Help You
Crypto trading is 20% markets and 80% mind games.
Trading is a mind game. Most of the time⊠youâre not trying to beat Bitcoin. And youâre not trying to out-smart the markets. You may think thatâs what youâre doing.
But the fact is, most of the time, the game is really a psychological battle between your logic and your emotions. The Stop Loss is a tool to help you with risk mitigation, and it can certainly assist in reducing losses during this turbulent time with Bitcoin and the cryptocurrency market. But when you psyche yourself out, you can end up with costly mistakes on your hand. These mistakes include selling too early, buying back in too early, buying back in at a loss and then watching it plummet back down again for even more loss⊠The list goes on.
Sometimes, it helps to get out of your own head and talk with other traders to get more control of the logical side of your mind. If you think thatâll help, I invite you to come chat with us over at Cosmic Trading. Weâre a group of over around 9,000 cryptocurrency traders ranging from complete novices to experienced traders who have lots of experience in trading and/or cryptocurrency.
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If youâre wondering how people make decisions on when to buy and when to sell, experienced analysts like Xander, Chivashon and FinanceFox are lurking around to assist with educating community members about technical analysis and providing signals for opportunities to buy and sell.
Support Me!
If you like what youâve read and want to help support my writing, please consider the following options:
- Sign up through my Binance Referral Link if you havenât gotten a Binance account yet. It gives me a percentage of trade fees, so at least you know some of your fees are going to a good cause!
- Join EARN with my referral link and get paid with Bitcoin for very simple tasks. Most of the time, itâs cryptocurrencies just asking you to join their Telegram. And you get a dollar-worth of BTC for doing it!
- Get Robinhood using my Referral Link to do two things: 1) move us both up on the wait-list so we can start doing no-fee crypto trading sooner, and 2) get us both a free, random stock from the stock market!
- Ethereum donations are very cool, too: 0x4Bcb32a2726B07160e8e8305f2344Af5495D9540
Come find and chat with me!
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Crypto Trading Tips: How to Stop Losing Money Like a Noob was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.