What is a Bitcoin Trading Stop Loss? and the Aspects a Trader Should Consider When Setting Stop Losses

Stop Loss is a type of Bitcoin trading order that is placed after opening a Bitcoin trade that's meant to minimize losses if the market moves against you. It's a predetermined level of closing a losing trade transaction and it's meant to control losses in trading.

A stop loss order is an order placed with your online broker that will automatically close your transaction when the BTCUSD price reaches a predetermined price. When the set level is reached, your open transaction is liquidated so as to cut your trading losses.

These stop losses are meant to limit the amount of money which a trader can lose: by closing out the trade transaction if a specified price that is againstcontra-tocontrary-tocounter-to the trade is reached.

For example, one might buy BTCUSD at $5950.000, and place a stop loss at $5900.000. If the BTCUSD price goes against you and reaches $5900.000, the stop loss order will be filled and the transaction will be liquidated thereby limiting the loss to 50,000 points ($50).

Regardless of what you may be told by other-tradersothers, there is no question about whether these trading orders should or shouldn't be set - these orders should always be set.

One of the most complex things in in BTCUSD Bitcoin cryptocurrency trading is setting these stop loss orders. Place the stop loss orders too close to your entry price & you're liable to exit the trade position because of some random market volatility. Place it-toothe-stop-loss-order-too far away and if your'e on the opposite side of the trend, then a small loss may turn into a big one.

Critics will point out several disadvantages of using these orders; that by setting them you are guaranteeing that should your open trade position go in the wrong direction, you-willyou'll end up selling at lower prices, not-highernot-at-higher-prices.

Skeptics will also argue that in setting stops you are vulnerable to exit a transaction just before the market moves in your favor. Most investors have had the experience of setting these orders & then seeing the price retrace to that level or just below it, & then go in direction of their original market trend analysis. What may have been a profitable trade transaction rather turns into a loss.

Experienced Bitcoin traders always use stop loss orders as they are an important part of the discipline required to succeed because they can prevent a small loss from becoming a large one. What's more, by diligently setting these stop losses whenever you enter a position, you end up making this important decision at the point in time when you're most objective about what is really happening with BTCUSD market price, this is because the most objective technical analysis is done before opening a trade. After entering the market one will tend to interpret the market differently because they have a bias towards one-sidea-particular-side, the direction of their market technical analysis.

Unexpected news can come out of the blue & dramatically affect the BTCUSD price: this is why it's so important to have a stop loss order. Its best to cap losses early when a trade position is moving against you, it is best to cap your losses immediately rather than waiting for it to become a big one. Again, if you set your stop orders when you're opening a trade transaction, then that is when you are most unbiased.

A key question is exactly where to place this order. In other words, how far should you place this below your purchase price? Many BTCUSD traders will tell you to set predetermined - maximum acceptable loss, an amount that's based on your trading account balance rather than use of technical indicators of the BTCUSD pair.

Professional money managers advice that you shouldn't lose more than 2% of your trading account equity on any one single BTCUSD transaction. If you have $50,000 in trading capital, then that would mean the maximum loss you should set for any single transaction is $1,000.

If you bought 10 standard lots of a BTCUSD pair, then you would limit your trading risk to no more than $1,000. In which case you would put your stop loss at 100,000 points ($100 per each lot) & would have $49,000 left in your trading account if you exited the trade transaction at the maximum loss allowed. The topic of money management & risk management is wide and it's discussed under money management topics.

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Factors to Consider When Setting Stop Losses

The more important question is how close or how far this order should be set from the price where you entered the trade position. Where you put this order will depend on several factors:

Since there aren't any rules set in stone as to where you should put these stop loss levels on a Bitcoin price chart, we follow general rules which are used to help set these stop losses correctly.

Some of the general guidelines used are:

1. Risk - How much is a trader willing to lose on one trade? The general rule is that a trader should never lose more than 2 percentage of the total account capital on any one single BTCUSD trade transaction.

2. Volatility - this refers to the daily price range of the BTCSUD pair. If the BTCUSD pair routinely moves up and down in a range of 100,000 points($100) or more over the course of the day, then you cannot put a tight stop loss. If you do, you will be taken out of your trade trade transaction by the normal volatility.

3. Risk: reward ratio - this is the measure of potential risk to reward. If the market conditions are favorable then it's possible to comfortably give your trade more room. However, if the market is too choppy it then becomes too risky to open a trade trade position without a tight stop loss, then don't open the trade transaction at all. The risk:reward ratio is not in your favor & even setting tight stops won't guarantee profitable results. It would be more wiser to look for a better trade position the next time.

4. Position size - if the position size opened is too big then even the smallest decimal price movement will be fairly large in percentage terms. This means that you have to set a tight stop loss which might be taken out more easily. In many cases it is better to move to a smaller trade transaction so-as-tosothat-to allow your Bitcoin trade position more space for fluctuation, by placing a sensible level for this stop loss order while at same time reducing risk.

5. Account Capital - If your account is under-capitalized then you'll not be able to set your stops accordingly, since you will have a big amount of money in a single trade transaction which will force you to put very tight stop losses. If this is case, you should think seriously about whether you have enough capital to trade Bitcoin in the first place.

6. Market conditions - If the price is trending up-wards, a tight stop loss may not be necessary. If on the other hand the price direction is choppy and there is no clear direction then you should use a tight stop loss order or not open any Bitcoin trades at all.

7. Chart Time Frame - the bigger the chart time frame you use to trade BTCUSD, the larger the stop loss set should be. If you were a scalper trader your stop losses would be much tighter than if you were a day trader or swing trader. This is because if you're using longer chart time-frames to trade and you determine the price will be moving up it does not make sense to set a very closetight stop loss because if the Bitcoin price swings a little then your stop loss order will be taken out.

The formula of setting stop losses that you choose will significantly depend on what type of Bitcoin trader you're. Most commonly used technique to determine where to set stop losses is - resistance and support areas. These areas give good points for placing these stop loss stop orders as they are the most reliable levels, because the support & resistance levels won't be hit many times.

The formula of how to put these stops which you choose should also follow the guidelines above, even if not all of them, at least those that apply to your Bitcoin trading strategy.