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What is a Stop Loss and Why is it Needed in Cryptocurrency Trading?


In the era of technology, e-commerce has become one of the most popular business models. Consequently, cryptocurrencies were created and have been growing constantly. Cryptocurrency is a new monetary system that is implemented by many companies because it is an easy way to send and receive payments.

The cryptocurrency market is highly volatile and risky. In order to minimise losses every trader who trades in cryptocurrencies or any other assets uses various aids in their work. Stop-loss  can be considered as one of basic tools that are used for the proper implementation of the strategy, as well as to simplify the trading process itself.



What is a pending order?

A pending order is an instruction to buy or sell a financial instrument in the future if certain conditions occur. There are 4 main types of  a pending order:

  • Buy Limit – trade order to buy at the “Ask” price equal to or lower than that specified in the order. The order is set below the current price.

  • Buy Stop – trade order to buy at the “Ask” price equal to or higher than that specified in the order. The order is set above the current price.

  • Sell Limit – trade order to sell at the price “Bid” equal to or higher than that specified in the order. The order is set above the current price.

  • Stop Loss – trade order to sell at “Bid” price equal to or lower than that specified in the order. The order is set below the current price. 

Why Stop Loss is Used?

Stop Loss is a tool that is used by investors to minimise losses. When you don’t have enough time to sit in front of your computer and constantly monitor the price fluctuations of all your traded assets yourself in real time, you can use this tool that can do it for you. For example, Josh bought $2000 worth of Ethereum. The maximum loss he is willing to incur from this transaction is 20%. In this case, Josh needs to place a stop loss order at $1600. In a scenario when price drops to or below $1600 the order for selling is placed. This prevents Josh from losing more than $400 or 20% on his investment. Many investors consider it as insurance.


Conclusion

Stop Loss is an important tool to work on the cryptocurrency market, which allows to reduce losses and In addition, thanks to the pending orders, experienced traders can more accurately follow their strategy, reduce the psychological burden of trading and don’t have to constantly monitor their assets. Therefore, every market participant should study the possibilities of such deals and apply them in their activity.

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