Stop-loss is a crucial risk management tool in trading, particularly in automated trading systems. It's designed to limit an investor's loss on a security position that makes an unfavorable move. Essentially, Stop-loss automatically sells a position when its price drops to a certain point, helping traders minimize potential losses. Find out everything about Stop-loss in this article.
How does Stop-loss work in automated trading?
In automated trading platforms like Cryptohopper, Stop-loss is configured to sell a position when it falls below a specified percentage of the purchase price. For instance, if you set a 2% Stop-loss, the system will automatically sell the asset if its price drops 2% below the buying price.
Configuring Stop-loss in Cryptohopper
Stop-loss settings
Enable: Activate this setting to allow the trading bot to sell positions at a loss if they fall below the configured percentage.
Stop-loss percentage: Enter the desired percentage as a positive number. For example, input 2.5 if you want to sell when the price drops more than 2.5% below the purchase price.
Stop-loss timeout: Set a time delay before executing the Stop-loss after the threshold is reached. This helps avoid selling during brief price dips that quickly recover.
Percentage ask: Optionally set a higher selling price than the current market rate for potential extra profit, or lower to make sure your order gets filled.
Where to configure Stop-loss
Base Config: Apply stop-loss to all your positions.
Config Pool: Set stop-loss for specific cryptocurrencies within a config pool.
Open Position: Adjust stop-loss for individual open positions by clicking "Info" on the Dashboard or Advanced Dashboard.
Important considerations
When using trading signals, the Signal config may override your Stop-loss settings.
If using DCA (Dollar Cost Averaging), ensure your Stop-loss percentage is lower than your DCA trigger percentage to avoid conflicts.
Adjust your 'Max open time sell' setting if using a higher percentage ask to allow sufficient time for the order to be filled.
Benefits of using Stop-loss
Risk management: Automatically limit potential losses on your cryptocurrency investments.
Emotion-free trading: Remove emotional decision-making from the selling process.
Peace of mind: Set it and forget it, knowing your downside is protected.
Flexibility: Adjust Stop-loss levels for different cryptocurrencies or market conditions.
Potential drawbacks
Premature selling: May sell during short-term dips, missing out on potential recoveries.
Gap downs: In fast-moving markets, assets might open much lower than your Stop-loss price.
Optimization challenges: Finding the right balance between protection and allowing for normal market fluctuations can be tricky.
Stop-loss is a powerful tool in automated trading, offering protection against significant losses while allowing for potential gains. By understanding and properly configuring Stop-loss in your trading bot, you can create a more robust and less risky trading strategy. Remember to regularly review and adjust your Stop-loss settings based on market conditions and your risk tolerance.