Cryptocurrency Trading: Stop Losses VS Mental Stop Losses

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You might have heard that some professional traders don’t use stop losses. This might be all well and true; however you must also realize that they also have multiple years of experience under their belt. They’ve dealt with these stressful situations more times than you can probably count.

On the other hand, seems like everywhere you look, you see a ton of advice from other “so-called traders” telling you that you should never trade without a stop loss. With all the conflicting advice, which one do you choose?

As you can imagine, there’s pros and cons to each. Depending on your trading style (if you have one yet) and experience, this will vary from person to person.

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Personally, I tend to lean more towards using stop losses than not. I’ve found myself losing a lot more money from not implementing these handy “safety nets”. Believe me; I’ve had my fair share of trades without them and none have turned out well.

With that said, this doesn’t mean that you shouldn’t explore your own trading style and see which one works best for you.

Cryptocurrency Stop Losses

stop-loss-crypto-tradingFor those of you that are brand new to trading, stop losses are orders that a trader places at a specific price which automatically executes a buy or sell at a certain price point.

If you’re “long on a trade”, you would utilize a sell stop loss at a level below your buy-in price. This is what majority use along their trades. If you’re shorting a trade (margin trading) then you would set your stop loss as a sell order above your buy-in price.

One of the main purposes of setting a stop loss is to allow yourself to remove all emotions from your trading decision. It also serves a secondary purpose of not having to worry about watching over your position like a hungry jackal. Setting a stop loss will allow you to actually enjoy your life and walk away from the charts without your trade completely tanking.

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In order to make a thorough decision on whether to use a stop loss or not, you should consider the advantages and disadvantages behind each one. If you decide against using a stop loss, I highly recommend you test this strategy on a demo account or with a very small amount of currency.

What are the Advantages of Using a Stop Loss?

 

In many cases, traders don’t want to close a trade because they somehow think that the market will eventually reverse in their favor . The problem with this train of thought is, markets don’t typically move towards an individual traders favor, no matter how powerful you think your Jedi mind tricks are.

On the other hand, stop losses allow you to just “set it and forget it”. This gives you the freedom to walk away from your charts, have a life, work on other business matters, enjoy a hobby, exercise…. you get the point. In not utilizing stop losses, you’re essentially staring at charts all day. Setting alerts for key price points will still have you glued to your smartphone.

An apparent benefit to using a stop loss is the fact that it eliminates “trading discipline” which you might have not cultivated yet. No matter how mentally tough you think you are, it takes the willpower and mental fortitude of a triathlete. It’s tough to cut a loss once your trade has gone completely sour.

Keep in mind; you need to be confident in your trading strategy in order to stick to your original plan. Setting a stop loss and take profit will help you stick to your original game plan as intended.

Overview of Stop Losses:

  • Grants you freedom from watching charts all day or staying glued to your smartphone.
  • Strips you of the mind games that you’ll be putting yourself through with mental stop losses.
  • Much more practical to use for traders who have less than a few years of experience trading.
  • Overall….less stressful.

Using Mental Stop Losses

 

A mental stop loss is referred to as a stop loss you “remember” to set before opening your trade. This is unlike a ” standard stop loss” which is manually set on a cryptocurrency exchange. A mental stop loss only abides by the rules you put into action “if” your trade moves below your buy in price. It’s only as flexible as your mind allows it to be. 

A mental stop loss will test your trading discipline. Trust me, when those dips get deeper, that panic button starts to look more and more enticing.

However mentally strong you think you are, it’s nothing compared to the feeling you’ll get once that dip accumulates more sizable losses.

PRO TIP: I’ve typically found, once a major dip has occurred, a quick rebound in price action will follow. The real question is, will this rally lead you back to those tasty profits, break-even point, or merely soften the blow with a smaller one?

My advice is, take a look at the charts history and see what happened with previous dips. Which of the three options mentioned above, did the previous dips most often follow?

Set a trailing stop loss underneath each previous candle. I’ll typically move my stop loss in this manner, as to avoid a sharp reversal.

trailing-stop-loss-chart-crypto

Analyzing Your Charts & Order Books

 

Cryptocurrency trading is an extremely volatile market. It’s been known to trigger stop losses on more than a few occasions. A short-term fluctuation could easily trigger a premature stop loss. This is why I highly recommend you set stop losses on a “per chart basis”.

Each chart comes with its own story. There will be a wide range of fluctuations that you need to analyze for each one.

Some charts tend to fluctuate 2 to 3%, others will fluctuate 10 to 15%. Always take a look at your charts history to view previous candlestick fluctuations, in order to decide on what range to work with.

Does it often dip 10% and rally for more prominent gains? Does it consolidate for several hours before an increase in price action? You can easily answer these questions for yourself by looking at your current charts history.

Analyzing the Order Book for Guidance

Another item you want to check before setting a stop loss is the order book. Order books show a list of orders from any given exchange which records the interest of buyers and sellers in the market at any particular time.

By analyzing buy and sell walls, you can get a good indication as to where to place your stop loss. Make sure to place your stop loss at least a few percentages behind a high buy wall, when trading on a long position.

This strategy paired with historical chart data, will allow you to formulate a more sustainable stop loss location.

Implement these variables into your stop loss strategy and you’ll lower your chance of triggering a premature stop loss.

order-book-stop-loss-placement

There are going to be occasions where stop losses are triggered, no matter how strategic you are. Just remember, there’s no such thing as a perfect strategy. All you can hope to accomplish with any trading strategy, is to minimize your losses and maximize your potential gains. However, you’ll win a lot more of your trades than not, if you stick to this very simple, yet effective strategy.

Overview of Mental Stop Losses

  • Great way to eliminate triggering premature stop losses before a major rally.
  • If a charts history and order book are not followed, manual stop losses will potentially lose more trades than not.
  • If you decide to utilize mental stop losses, practice with a demo account or smaller amounts of currency.

Conclusion

analyzing-and-trading-chartsEach chart has a different story to tell. Some may fluctuate wildly while others maintain a more consistent and stable support. Although mental stop losses have their time and place, I highly advise anyone who has less than a few years of consistent trading experience to stay far away from them.

Look at it like this…

Your time is much more valuable than the capital you trade with. If a dip continues deep into a bear market, you’ll have only two choices. Take a greater loss than you had originally intended or get left holding bags until the coin reverses and potentially reaches your buy zone again.

Waiting for your coin to recover can cost you a lot of time. Meanwhile, holding onto those  bags will cost you a lot of time which you could be using on winning trades. This could be prevented if you had a standard stop loss in place.

Don’t trade your time for money. Get in, get out, and move onto another trade.

Good luck and happy trading!

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