“The crypto market and price of cryptocurrencies are volatile.” – This is a phrase that is undoubtedly familiar to members of the crypto community and even to non-crypto traders. It is true that the crypto market is full of uncertainties and a multitude of factors can lead to the rise or crash of prices. No matter how well traders plan their investment strategies, no plan is 100% foolproof. In cases where their initial plans fail, they will have to decide on where and how to cut their losses to minimise the damage as much as possible.
Why should traders cut their losses?
Firstly, this is so that traders do not incur massive losses in their portfolio, especially if the price moves beyond the moving average (such as the 200-day line or the critical support trend) as the price may see a downward trend for a long period of time.
Moreover, it is essential for traders not to lose the opportunity to re-invest even after making losses on the previous trade. Cutting your losses and finding another investment opportunity may help you recoup some of your losses if the next trade yields some profits.
How do you choose your stop-loss point?
There are three ways to select a stop-loss point:
1: Exponential Moving Average (EMA) – Depending on your investment style (for example, if you are a short- or long-term investor), the selected line for the stop-loss point will differ. For long-term investors, they usually use the average 200-days line to check if the overall market reflects significant losses. They can also view historical statistics, such as if asset prices have dropped in the average 30-Days.
2: Look at the Original Low (Elliott Wave Theory) – If prices do not reach a new low, it may be safe to predict that price will continue to rise. However, if it falls below the lowest price previously recorded, this indicates a weakening uptrend which may turn into a downtrend, so it may be wise to cut your losses before then.
3: Look at Fibonacci Numbers – Used as a decision point. Based on your entry point and the different support or resistance lines traced out on your graph, you can place your stop-loss point at either just past the next level from your entry point or past a recent high or low turn. Using this method can help you to analyse market prices in more exact terms, but should be combined with more tools and consideration of other factors to give you a clearer idea of where to place your stop-loss.
Many traders make the mistake of being too flexible with their stop-loss points and tend not to cut their losses when prices turn for the worse. In the crypto market, prices can drop so quickly that it’s almost impossible for traders to react in real-time, so a stop-loss order helps to solve this problem. Crypto exchanges also allow traders to set alerts so that they are updated immediately when the prices change and engages the stop-loss order automatically.