How to Set Stop Loss Correctly in Cryptocurrency Trading: Strategies for Professional Traders

The purpose of a stop loss order is to set a maximum risk limit on any trade. Implementing an appropriate stop loss order is a critical component of any risk management strategy. Do you use one? If not, it is essential to create your own capital management strategy before proceeding.

By correctly setting a stop loss order, you minimize your risks and remain active in the cryptocurrency market for a long time.

If you are using a stop loss order incorrectly, you will notice that it is often triggered, the trade is closed, and immediately the price returns in the direction you had predicted.

Why does this happen so frequently in cryptocurrency trading?

The Incorrect Way to Set Stop Loss in Cryptocurrencies

Imagine that you decide to risk only 2% of your account balance on any trade.

With an account of $10,000, your maximum loss per order would be $200.

When analyzing the chart of a cryptocurrency pair like BTC/USDT, you decide to enter a buy position at the current point.

Suppose you buy 2 Bitcoin perpetual contracts.

Each movement of $50 in price represents a corresponding gain or loss. With two contracts, for each price movement, you will gain or lose $100.

Considering this, you set your stop loss at 24,680 USDT to maintain your maximum risk of 2%.

You feel confident in managing risks and following the basic principles of trading. You are behaving like a pro.

Two minutes later, your stop loss is hit.

You think: "At least I limited my risk in this trade."

But did you really do that?

What actually happened was that you entered into a trade with a very low probability of success, practically inviting the market to hit your stop loss.

In reality, you positioned your stop loss exactly at the opposite point to what a professional trader would do.

How to Properly Set Stop Loss in the Cryptocurrency Market

Let's analyze the correct way to position this stop loss and enter the same order.

When does a bullish trend really reverse in the cryptocurrency market?

When sellers manage to break the previous support, such as the level of 24.665 USDT in our hypothetical example:

Most traders would agree that below 24,650 USDT, traders with long positions will start to abandon their positions, triggering their stop loss orders.

Therefore, let's set our initial stop loss order at 24,647.5 USDT.

As we only have room for two available risk points ( considering our limit of $200), we should not be willing to pay more than 24,667.5 USDT for this operation.

But this means you would need to wait for a significant correction to enter the position.

An alternative is to use only one contract instead of two.

Thus, you would have up to 4 risk points to apply in this same operation. With one contract moving $50 per point, it would take 4 points to reach your maximum risk of $200.

Now you can pay up to 24,647.5 + 4 = 24,687.5 USDT for the same operation.

Yes, you will earn LESS if you are correct about your analysis.

But your job is NOT to make more money, but to manage risks properly.

You should be proud that you will LOSE LESS if you are wrong. This is how a true risk manager thinks in the cryptocurrency market.

Overall, a correction to 24,680 USDT is much more likely and results in a trade with a higher probability of success.

Why Your Stop Loss Is Frequently Hit in Cryptocurrency Trading

At the beginning, I mentioned that most traders have their stop loss orders triggered before the trend continues in the expected direction.

Why does this happen so frequently in the cryptocurrency market?

As most beginners are in the market to seek quick gains, they adjust their risks to enter the market as quickly as possible.

When amateur traders get emotional and put their capital at risk, professionals use this as an opportunity. They trigger stop loss orders on the downside first, flush out the newcomers, and then buy at lower prices to take advantage of the upward trend.

The most interesting aspect is that a small adjustment in the way you set up your stop loss order will drastically improve your results in cryptocurrency trading.

Whether you are a professional trader or a beginner, making small adjustments to your risk management will yield much greater returns in the long run than blindly chasing profits based on emotion.

A well-placed stop loss is the difference between surviving in the volatile cryptocurrency market or being eliminated during the first significant corrections.

Have you ever tried improving your stop loss settings? What techniques have worked best for your cryptocurrency trades?