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Understanding a stop loss order for your crypto investments

We’re advancing in the era where we have innumerable doorways to earn money. It feels like finding opportunities to earn money has never been as easy as it’s now. But there’s a catch – with comfortable money comes severe risk! And to prove our point we’re going to target our famous crypto markets.

Cryptocurrencies are one of the many doorways to invest and make money. But does it bring easy money? We would say that’s a subjective concern. Nonetheless, cryptocurrencies can be a reliable source of income if dealt with discipline and a few promising tools. 

Tools such as evaluating the risk-reward ratio of the trade, and designating a stop loss order for your trade, can increase your overall odds of extracting profits from the market.

Losses are meant to hurt right? But using stop loss in your trades can minimize your mental hurt regardless of loss. Unlike stock markets, crypto markets operate 24/7, and stop loss gives you superiority amid a market crash. 

Crypto markets are gaining exposure with time. Despite the decentralized nature of cryptocurrencies, people are assessing them as an investment option. When there’s money entangled, it’s always a wise decision to gain clarity. 

Stop loss is one of the effective tools in the financial markets that provides clarity about our loss-bearing capacity and saves us from an unpredicted market crash. So, let’s understand the stop loss in detail.

What is stop loss?

Stop loss as the name indicates helps you maintain your losses. Financial markets are sensitive, sometimes in a blink, it can wipe off your profits. However, stop loss gives you control over your losses. 

Profit is desirable, but everybody wants to escape loss. The clever trader is the one who apprehends the nature of the market and prepares himself for the sometimes inevitable loss. Well, in financial markets someone’s loss is your profit. 

But to gain control over how much you can lose is what stop loss is. Before initiating a trade you evaluate your loss-bearing ability and establish a stop loss point for that trade.

Let’s say, you’re buying a crypto asset at ₹10 and your loss-bearing capacity is ₹4. You initiate a stop loss at ₹6. Just in case the market goes further down, then your position will automatically be squared off at ₹6. 

In the above-mentioned scenario, what if you don’t designate a stop loss point? Then based on the volatility of the market it can diminish your gains in a glimpse. From ₹10 it can level down to ₹1, making you suffer extreme loss. 

But stop loss gave you the command over the market and helped you dictate your loss. How powerful is that right? You’re under the supervision of your losses too. Now, when you know the notion behind stop loss, let’s find out how to effectively apply stop loss in your trades.

How to effectively use stop loss in your trades?

The concept of stop loss is not rocket science but it needs a degree of knowledge. You need to learn where and when to apply for a stop loss order. Your designated point of stop loss order will decide the outcome of your trade. 

Let’s say, you initiate a trade at ₹10 and you apply for a stop loss order at ₹8, in this case, based on the volatility of crypto markets likelihoods are high that it will hit your stop loss target, and you’ll be at a loss of ₹2.

In the same scenario, if you apply for a stop loss order at ₹6, then the probability of hitting your stop loss point decreases. Hence, your probability of winning profits increases. 

Crypto markets are volatile. Based on the attending situation of the market and your technical analysis you should choose a stop loss point. The closer your stop loss target is to your entry point, the increased the chances are that it will catch up with your stop loss point rather than your set profit goal. 

Stop loss helps you to define your loss-bearing capacity, but that doesn’t mean that you’re aiming for loss. Even though you’re activating a stop loss order, all you want is to gain money from trade right?

Avoid using arbitrary figures to initiate your stop loss target. Go through a detailed analysis of the market, study, and then decide on a stop loss point. So, the most effective stop loss target for your trade would be the one that aligns with your loss-bearing capacity and with the present market condition.

Wrapping up

Crypto markets are one of the preferred sources of income, and it has delivered promising profits to people. As an investor, you can maximize your chances of earning profits, but you can never be sure about it. That’s the truth about financial markets. 

In the situation of a market crash, you wouldn’t want to be a part of the wave right? So, stop loss can be your companion in such a situation. Not that, you’ll not lose money, but the loss will be in a controlled format. And we humans find pleasure in our ability to control things. 

Learn from your previous investments. The worst thing you can do to your money is to stake it on some arbitrary numbers. Learn to read data and charts, perform technical analysis, then make a decision.

If possible initiate a stop loss in every trade you make, we can always anticipate but can never be foolproof about it. So, why not act smartly?

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