Trading School ยป How to stop-loss and why

How to stop-loss and why

Whether you are a day trader or a swing trader, it’s a very good practice to put stop-losses on your trades. Here you will find why and how to put a stop-loss.

Trading means managing risks as well as discovering assets or symbols that will increase in value. Every trade you go in, every position you open comes with the risk of loss as well as the potential to make money. Experienced traders open many positions during trading sessions and aim for a meaningful majority of their positions to result in profits. Even for the most successful traders, it is very common for some positions to end in losses. Hoping and holding for each position to result in a profit results in bigger losses due to the nature of trading. To prevent this, it is important to determine the stop-loss level before opening the position. In this way, even if the trade you entered is unsuccessful, you will limit the damage that will occur.

Why you should set a stop-loss

Your risk perception differs from each other before opening the position and when the position is open. Decisions made while the position is open are more prone to shift to the irrational side due to psychological factors. It’s easy to think that a losing position will turn into a winning “just in a little while”, or to believe that a winning position will win “for sure” even more. For this reason, it is best to set the limits for both loss and gain with a clear mind before opening the position.

Buy and stop-loss levels on the chart

How to set it

One of the best approaches to the stop-loss issue may be the “entry ticket“. By assuming that every position you open (for example, you buy a coin) has an entry ticket fee, you can choose to close the position when this entry ticket fee is exceeded after the position starts to lose money.

For example, let’s say you buy a coin for $100 and are willing to risk a maximum of $5 for this trade. When opening your position (or as soon as you open it), you must enter a conditional sell order that will automatically run if the price drops to 95. If things go wrong, you will lose at most $5! Not too bad, huh?

Be aware: The order you enter for stop-loss may be executed slightly below or slightly above the amount you have determined according to the current exchange conditions.

Trend-breaks may require you to stop

Another approach you can use to determine your stop-loss levels is based on trend-breaks. When the trend lines that can be clearly observed on the chart are crossed in the opposite direction, you may want your trade to close automatically, assuming that the conditions you have decided for this trade are no longer valid. For example, if you saw a rising support line break down, you would not want to open a buy/long position. You can create your stop-loss orders by determining these situations in advance.

The exchange you are trading may offer different order types for stop-loss. For example, you can find Binance’s stop-loss guidelines here.