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How does Stop-loss work?

Learn how Stop-loss works in automated trading. Discover its benefits, drawbacks, and how to configure it for effective risk management.

Pete Darby avatar
Written by Pete Darby
Updated over 10 months ago

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

  1. Enable: Activate this setting to allow the trading bot to sell positions at a loss if they fall below the configured percentage.

  2. 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.

  3. 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.

  4. 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.

    Stop-loss automated trading Cryptohopper - Base config
  • Config Pool: Set stop-loss for specific cryptocurrencies within a config pool.

    Stop-loss automated trading Cryptohopper - Config pool
  • Open Position: Adjust stop-loss for individual open positions by clicking "Info" on the Dashboard or Advanced Dashboard.

    Stop-loss automated trading Cryptohopper - Open position

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

  1. Risk management: Automatically limit potential losses on your cryptocurrency investments.

  2. Emotion-free trading: Remove emotional decision-making from the selling process.

  3. Peace of mind: Set it and forget it, knowing your downside is protected.

  4. Flexibility: Adjust Stop-loss levels for different cryptocurrencies or market conditions.

Potential drawbacks

  1. Premature selling: May sell during short-term dips, missing out on potential recoveries.

  2. Gap downs: In fast-moving markets, assets might open much lower than your Stop-loss price.

  3. 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.

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