As a crypto trader, it is important to adopt strategies that can help you maximize profits while keeping losses as minimal as possible. There are several risk control tools you can apply in your trading strategy. Some of them include the stop limit and stop loss orders. We will discuss these two in this article. By the end, you should have a clear understanding of their key strengths and weaknesses.
Stop Loss Order: What is it?
This type of market order allows investors to limit possible losses in a given trade. So how do they execute it? They predetermine the level at which a cryptocurrency will be automatically sold in case its price touches it. A stop loss is set according to a trader’s risk tolerance.
What are the Benefits of Stop Loss Orders?
Limit Losses: By now, you probably know that the crypto market is highly volatile, meaning wild price swings are common. To shield yourself from suffering significant losses, you can use stop loss orders.
Automated Process: After setting a stop loss, you do not need to stare at the market for hours. That’s because your broker will automatically execute a sell order once the stop loss is reached.
Emotion Control: When trading without setting a stop loss, it is possible to get emotional and engage in panic selling if the trade does not go your way.
Risk Management: To be successful in trading, you need to employ the right risk management strategies. One of them is using stop loss orders, which will protect you from suffering severe losses.
Flexibility: After opening a stop loss order, it does not mean you cannot adjust it along the way to accommodate any market change. This offers you the flexibility for need as a trader.
Cost-effective: Not a single broker charge traders for applying stop losses. This makes stop loss orders a cost-effective risk control measure.
Exit Strategy: When investing your funds in a volatile crypto market, it is essential to predefine exit points because the market can take unexpected downturns at any time.
Drawbacks of Stop Loss Orders
Market volatility: Since the crypto market is highly volatile, the wild prices can trigger stop losses unnecessarily, causing you to exit the market prematurely.
Risk of Missing Out on Future Gains: Sometimes, a crypto price may rebound immediately after hitting your stop loss. Thus you may miss out on huge profits if it rallies significantly.
Possible Manipulation: Market markers have the tendency to artificially pull a crypto asset’s price down to stop losses in order to grab liquidity, bringing losses to investors.
Stop Limit Order: What is it?
This market order involves a trader setting a stop loss together with a limit order. So how does it work? It’s simple. When a token touches the stop loss, the limit order is immediately activated but will only be executed when the price reaches the predetermined limit price.
Here is an example: On June 26, you notice BNB is on a downtrend, so you set a stop loss at $240 and a limit price at $237. Once the token hits $240, the broker activates your limit order but only executes it after BNB’s price reaches $237. Note that the limit order won’t be filled if the token’s price fails to trigger the limit price.
What are the Benefits of Stop Limit Orders?
Strategic Trading: A stop limit order allows traders to open positions strategically since they only enter a trade once certain conditions are filled.
Shields Traders From Volatile Market: A stop limit order protects a trader from the highly volatile crypto market by allowing them to set a limit price to avoid selling a token at a price lower than predicted.
Drawbacks of Stop Limit Orders
Do not guarantee execution: A crypto asset may reach a stop loss but fail to trigger the limit price. This means the limit order will not be executed, leading you to lose out on profitable trading opportunities.
After looking at the two order types, we can conclude they are both useful in crypto trading. You can employ them depending on your trading objectives.
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