Using Stop Loss orders

One of the things the recent crash has made me think through is the concept of Stop Loss orders (essentially an order put lower than your buy price to get you out with a minimal loss if the market drops). Most of my trades in the past have been longer term… i.e. I’m buying into something which I’m invested in for the long term (by which I mean 1-3 years). These are projects that I believe are well run and will grow over time. Whilst that doesn’t mean I don’t care what happens in the short term, it does mean I’m less worried about a temporary drop. Thus I’ve not really got into the habit of using a Stop Loss order. However, I’ve recently moved back to try more short term trading, i.e. trading within the period of a few days or a max few weeks. My aim as discussed was to get to a point of making a few 0.01s a month.

Unfortunately I’ve been somewhat caught out, by the recent price drops. So much so that the coins I held have turned into somewhat longer term holds!

Partly that’s OK, because I followed my earlier advice not to invest where I wasn’t reasonably confident, however it has meant that I’m holding a bigger position than I would have liked and ultimately right now the amount of BTC I hold is lower than it was before.

This got me thinking about the Stop Loss order and how to use them effectively. It seems that the best option would be to allow some room for the market to fall a little below your buy in price. After all, it’s hard to judge the perfect point to enter, however, you should aim not to lose more than say 5% of your trade value. That minimises risk and lets you live to fight another day! So my suggestion would be to calculate the value below buy price that minimises your loss to 5%, unless the coin seems to swing wildly in which case look at recent troughs and consider setting just below that level. That way you allow for a “normal” drop so that doesn’t trigger the sell, but if it drops further you can get out.

If you’re interested to know about how to put these orders in, below are a couple of examples:

Here is a useful article on Steemit about setting Conditional order (Stop Loss orders) on Bittrex.

Here is a useful video covering the functionality of the Binance exchange