What is a Stop-loss order?
Anyone who is interested in cryptocurrency eventually realizes that relevant strategies are needed for successful trading. Forex market lossless trading strategy still does not exist, so traders may face financial losses, especially in unforeseen situations when dramatic improvements occur. If that is the case, players have got the instrument for regulating losses. In this article we are going to scrutinize the mechanism of applying the tool which is called a Stop-loss order. Many experienced traders apply stop orders for monitoring their digital assets even if they run out of time to check markets.
One of the first trading rules on the Forex market is obligatory placement of Stop-loss order in order to restrain possible loss if price moves in the opposite direction of an open deal. There is no doubt that the ability to manage losses is one of the most important trader`s qualities. This is a goal of a Stop-loss order. Many traders spend a few hours per day behind a monitor screen and open medium or even long-term cases. Accordingly, in order to secure his deposit from negative market fluctuations, a trader can set Stop-loss at the acceptable level for possible losses. Another reason why traders set stop orders lies in a short-term perspective and periods of severe volatility. Short-term traders risk significantly more than medium-term and long-term ones. Therefore, they need to worry even more about ensuring their risks, including by setting stop orders.
Stop-loss helps traders to reduce miscellaneous various technical failures. Suppose, at some point, a trader’s connection with a trading service is interrupted. He cannot forward orders to the broker`s server including orders to close a deal. If he has taken care of setting Stop-loss in advance, a broker will automatically close the deal upon reaching the specified level. It is a regular pending order to be processed with respect to market slippage, so actual value will differ from one set in trade parameters.
On modern turbulent markets, trading without Stop-loss is simply unthinkable. When someone loudly declares that he never uses Stop-losses, then professionals understand that his сollapse is only a matter of time.
The main ways to work with Stop-losses are as follows:
– Fixed one when a trader places a Stop-loss and does not change its value until the order is closed.
– Trailing stop loss when a trader sets a Stop-loss and, while the price is going in the desired direction, he moves it to opening place, setting it near highs or lows. This is usually done by professionals.
– Trailing stop is a variant of a trailing Stop-loss that moves automatically. It is better to use it by moving Stop-loss to breakeven. Trailing stop advantage lies in ability to choose a fixed distance from current price.
Each of these types has positive and negative points. By moving Stop-loss to breakeven, you are guaranteed to keep the deposit, but you get an option that will close you on a pullback. When fixed, you have the opportunity to wait out all price fluctuations and get a profit. When using a trailing stop, you fix a part of profit and in the event of force majeure situations, in any case, you will benefit.
Stop-loss acts as insurance provided for unpredictable market situations or any technical failures by closing positions at predetermined levels. It helps strictly follow trading strategy as the Stop-loss system will automatically cut losses saving trader`s time instead of monitoring terminal and controlling losses manually. It facilitates maintaining discipline.
Stop-loss is usually set by traders at particular levels which are well-known to market makers (exchange organizers, large investors, brokerage houses, etc.), whose goal is to knock out a huge mass of amateurs from the crypto market as well as take their deposits with quite honest methods.
Why do stop-loss orders work in traditional markets?
Traditional markets are not as volatile as cryptocurrency ones allowing Stop-loss orders to shine. As a rule, investors estimate their risks and determine approximate losses in case trade is not the way they have planned.
When the markets are less volatile, price fluctuations are insignificant. Hence, it makes sense to get out of a losing position and re-consider entry points and global strategy.
The most popular orders on crypto exchanges
The term “order” appeared in cryptocurrency trading from traditional exchanges for trading securities and various currencies. It is a direct action algorithm of a broker from a user with clearly defined action standards. It can be buying or selling digital currency when defining predetermined market conditions.
Modern trading platforms allow traders to use multiple orders to increase accuracy of trading techniques and ensure safety. Understanding when to trade is only part of the case as successful traders ought to know exactly about trading principles applying order relevantly.
The main task of any order is to work independently at the time when a trader cannot be present in the network.
There are several classifications of exchange orders, but they are often divided into 4 categories:
Market orders are placed at the current market price and is completed in just a couple of minutes (sometimes even less). The Bidder only specifies the number of coins that he wants to buy or “drain”. This type of order shall be used with caution, as current price at the moment may be unfavorable for you.
This is essentially a basic order type that is the best for beginners to start trading with. Its peculiarity lies in the fact that a user indicates not only the desired volume of the coins either on sale or purchase, but also the desired price for himself being beneficial in situations when a sharp jump or decline in the rate is expected. As soon as market value reaches the specified mark, transaction will be executed. If the selling bar is set too high, and the rate does not reach it, the transaction will not be completed.
This order is often used by that experienced traders. It allows protecting yourself from loss of funds when the rate falls or to make a profitable deal during the growth stage. Stop price is a trigger which activates your market order and places it in the order book. You have ability to assign a trigger to the last trade price, market price, or index price.
This order is ideal for capitalizing on short-term ups and downs in cryptocurrencies. If in the order book you see a huge number of orders for the purchase of some little-known cryptocurrency, then most likely there is an artificial heating of interest in it, which will entail a sharp jump (or pump).
To place a stop limit order, a trader must specify two prices: stop price and limit price. Stop price is a trigger and represents market price which activates your limit order. Limit price represents the worst price at which your order can be executed.
A thoughtful choice of cryptocurrency and determination of the right moment for entering a position always give positive results. On lucky days, you can make a profit by tens of percents without making any special efforts: trends at these moments do not give strong pullbacks, which allows you to take great achievements.
Occasionally there are auxiliary order types aimed at professional traders such as:
Fill or Kill is an order in which a deal is either executed at the price set by user, or it is completely removed.
One Cancels the Other order gives a possibility of simultaneously placing 2 orders at once allowing earning both when the market price rises or falls. If one of the orders is executed, the second is automatically canceled by the system.
Hidden order is not displayed in the general order book. As a rule, such orders are applied by a group of traders who want the rate to remain stable.
Stop loss is an important and necessary tool for trading in the Forex market. It relieves unnecessary nerves, disciplines and provides a number of opportunities. Placing a stop loss is a necessary step towards professional trading.
In order to insure your transactions calculate your risks, determine amounts of optimal loss for you and fix potential profit with which you plan to exit trade. Give profits the opportunity to grow, and never sit out losing trades. Remember about money management, during one transaction you cannot risk an amount exceeding 2-6% of the total value of your deposit.