There are multiple factors that traders need to consider before deciding to buy cryptocurrencies. For this reason, sometimes some important factors may be overlooked or not taken into account. Stop loss is one of these factors. The stop loss order can make a big difference when used correctly and everyone can benefit from it.

Stop Loss (Conditional order) is an order used in the cryptocurrency and finance space to mitigate losses and manage a portfolio consistently. It is a type of order that combines with a limit order.

With stop loss, traders can gain control without being exposed to risk. In other words, stop loss is used by traders to both benefit and prevent possible losses. Stop loss was created to limit the loss in the state of the asset.

Stop loss is an order to close a position by trading a security in the market when it reaches a certain price, called the stop price. It is different from a stop loss, which is an order to buy or sell a security at a specific price when the price of the security reaches the stop price. A stop loss can always be executed but may not be realized. For instance, a trader might buy a stock and place a stop loss 15% below the buying price of that stock. If the stock price falls to this 15% level, the stop loss is triggered and the stock is sold at the current price.

Cryptocurrency investors place stop loss orders strategically, taking into account resistance levels and asset volatility. Before placing a stop loss order, the investor defines the price and the limit price level at which the trade will be executed. After the order is placed, it is executed when the order is triggered.

Traders have the opportunity to set a minimal price for the assets in their portfolio. Once the minimum price is reached, the platforms automatically execute a sell order to limit the trader's losses. Stop loss is useful when trading volatile cryptocurrencies.

Stop loss is divided into two subgroups: buy stop orders and sell stop orders:

• A buy stop order is an order placed against the possibility of a breakout in an uptrending asset.
• A sell stop order is an order against the probability of a breakout in a bearish asset.

How Does Stop Loss Work?

Stop loss can be likened to a water tank. The floating ball valve used in water tanks automatically stops the flow of water when the tank reaches a certain level to stop overfilling or spilling. Similarly, a stop loss is a tool that automatically triggers the sale of a financial asset when its price reaches a certain level, defined as the stop price.

Traders or investors may choose to use a stop loss to minimize losses and protect their profits. When a stop loss is set, if the price of the securities starts to move in the opposite direction to the bought price, they can manage risk by exiting the position.

A stop loss to sell is a client order instructing a broker to sell a security when its price falls below a certain price. A stop loss to buy sets the stop price above the current market price.

How to Set Stop Loss Levels?

There are several factors to consider when setting stop loss levels:

• Volatility
• Liquidity
• Position size

Volatility

Stop loss should be set taking into account the volatility of a financial asset. The more volatile the financial asset, the more important the stop loss is.

Liquidity

Some financial assets are traded with very low trading volumes, which means that even with a stop loss, an exit may not be possible because there are no buyers. Therefore, taking a low liquidity financial asset comes with risks and it is important to use the stop loss strategy.

Position Size

An investor with a large position in an asset may find it difficult to realize it in an illiquid security. Therefore, investors should focus on taking positions that are more suitable for them when the size of the position is evaluated relative to net worth.

How to Determine an Accurate Stop Loss Level?

Setting the stop loss level is a subjective process that varies from person to person. A person with a high risk tolerance sets the level low, while a person with a low risk tolerance sets the stop loss level high. The most commonly used method for setting the stop loss level is the percentage method. Before setting the stop loss level, it is necessary to determine the percentage of stocks that the trader is willing to give up before exiting the trade.

What Is the Difference Between “Stop Limit” and “Stop Loss”?

Although stop limit and stop loss look similar, they actually have different structures. There is no execution limit price for stop loss, meaning that the order closes the position directly from the market. Therefore, stop loss orders can be quite risky, especially when liquidity is low.

A stop limit order, on the other hand, avoids unfavorable situations by setting a limit for the sell or buy order. With a stop limit order, the trader buys or sells within a certain price range.

What Is "Trigger Price" in Cryptocurrencies?

A "trigger price" in cryptocurrencies is a price level, usually set to activate an order or trade. A trigger price represents a price point on a cryptocurrency that automatically triggers a trade when it reaches a certain level. This point is used as a threshold that triggers buy or sell orders.

For instance, let's say the buy trigger price for a cryptocurrency is $10,000. If the market price reaches this level, a designated buy order is automatically triggered and the trade is executed. A trigger price allows traders to trade automatically at a certain price level without having to follow the market.

Trigger price can also be used in stop loss or stop limit orders.

What Are the Advantages of Using Stop Loss?

Using stop loss has some advantages:

• At no cost
• Minimizing losses
• Improving risk management
• Emotional control

At No Cost

The most important advantage of a stop loss order is that it is costless. The fee is charged only when the stop loss price is reached and the stocks need to be sold.

Minimizing Losses

By using stop losses, traders can protect their investments and avoid large or irreversible losses that could jeopardize their trading account.

Improving Risk Management

If investors gain more capital, their portfolios may look better. By effectively managing risk and providing a limit on losses, stop loss can help traders improve their overall trading performance and get closer to their investment goals.

Emotional Control

Lack of emotional control is one of the most important reasons for poor decision-making. Stop loss automatically stops a trade when a predetermined level is reached and removes emotion from the decision-making process. This helps traders avoid making sudden or emotional decisions that can negatively affect their trading results.

In addition, stop loss provides traders with the convenience of not having to monitor how a stock is performing.

What Are the Disadvantages of Using Stop Loss?

There are some disadvantages of using stop loss:

• Price slippage
• No guarantee
• Market gaps

Price Slippage

The stock market is a very volatile area, changing every second, and the price of a security may cross above the stop loss level, leading to price slippage. In this case, the trade may be executed at a price that is significantly different from the stop loss level, resulting in larger losses than expected.

No Guarantee

The main purpose of a stop loss order is to limit losses, but it does not guarantee whether a trade will be executed at the desired price. In volatile market conditions, the stop loss is executed at a much worse price, resulting in a higher loss.

Market Gaps

In certain situations, there are certain gaps on the markets that cause stop losses to fail. For instance, in markets with low liquidity, it is difficult to execute a stop loss at the desired price and therefore losses may occur.

The biggest disadvantage of a stop loss order is that if there are not enough market buyers to execute the order, a liquidity problem may arise.