Awesome guide to protecting your crypto trading profit !
You know the saying, a dollar saved is a dollar earned. It turns out that in trading, that’s even more pronounced. A dollar saved is better than a dollar earned. Here’s the math:
If you have 100 dollars, and you lose 10 dollars, that’s 10% loss, now you have 90 dollars.
To get back to 100 dollars, you have to earn back 10 dollars. Because 10/90 is 11% it means you have to have a ROI of 11% to break even a loss of 10%.
To make the example clearer, if you lose 50% of your money, it’ll take 100% profit in order to get back your loss.
So it is extremely important to protect your capital from bad losses. I would even say it is the most important thing as a trader, to avoid bad losses. How do you do that?
There are a variety of things you can do. You can limit your trades to ones with very strong signal only. Or have a strategy to manage your trading capital. But one of the most important is to have a good stop loss strategy.
Price based stop loss
Most people have an idea how much they are comfortable of losing, and thus set their stop loss that way. Some technical traders also use technical analysis to find a good stop loss price level. Price-based stop loss is very popular, but it suffers from a few problem.
First of all, you’ve probably heard of people who hunt stop loss. This means they purposefully drive the price down enough to trigger as many stop loss as possible, and after they’ll buy back at a lower price.
Secondly, as market volatility changes, it’s also important to change the stop loss level. For example, when the market changes from normal to fluctuate highly, you need to change your stop loss price to fit with the market condition, or you risk getting stopped out just from normal variation.
Thus, for serious traders, it’s better to avoid fixed price-based stop loss and have more sophisticated stop loss strategy.
Condition based stop loss
Similar to the price-based stop loss, technical traders could build their stop loss strategy based on conditions. This is only possible if you use technical trading software such as Luna to manage your trades.
By setting up different conditions for stop loss to occur, you can make sure the stop loss price is moved accordingly with changing market conditions. You can also have some protection against stop loss hunting if you add volume-based conditions. For example: You can configure Luna to only place stop loss orders if price is below the lower Bollinger Band, and volume is sufficiently high.
What to be aware of when setting up a stop loss strategy
Look back at the past charts and see what they have in common when stop loss should be triggered.
The key is to have a stop loss price that is lower than the normal variation of the price to avoid getting stopped out.
As previously mentioned about market volatility, you can use the ATR (average true range) indicator to have your stop loss change with market volatility.
Volume is also a good indicator to have usually. You may want to make sure the price moving downward has enough volume, not just a flash dump that would be back up right after.
Time-based stop loss
Another good strategy is the time-based stop loss.
If you enter a trade and the price simply goes sideway for a while, after a certain amount of time, you should probably exit the trade.
This situation indicates that your signal for entering the trade is not great, and staying under such uncertainty goes against our strategy of vigorously protecting our capital. Exit while it’s still sideway and protect against potential losses.
As a trader, it is vital to have a good stop loss strategy. Choosing a stop loss is not an exact science, but it still depends on many factors and thus should be formulated into a strategy. We've laid out 3 possible way to do stop loss, hopefully you'll experiment with them and get better at avoiding losses.