The most common misjudgment of volatility always happens when people think using a Stop-Loss is not necessary. A Stoploss is a trigger that takes you out of a trade because the trade outcome is negative. This trigger will take out the value you decide and convert it into your standard currency. Using one effectively means that you reduce your risk of losing more than you want to, it will make what you dictate, so if you are on the toilet and price changes rapidly against you, you will not miss the moment to sell. Using a Stop-Loss is crucial to becoming a successful trader or investor, and Stop-Losses will help you regret bad decisions less than not using one at all.
Five reasons why you should use a stop-loss while trading or investing
- Risk assessment – By determining the Stop-Loss, you calculate your immediate risk. Let us say you own a portfolio of 1000$ in Bitcoin; you decide to set your Stop-Loss to 5%. What that means is, when the price reaches the level of where your money is only worth 950$, it will take you out of the trade no matter what. Price movement can be very sudden, and these moves are often ruthless in kicking you out of your trade at a loss. However, trading is about winning and losing money. A good trade with a negative outcome is better than a bad trade with a positive outcome since this seduces us into the thought that what we did is right (which is wrong). If you just traded poorly, the Stop-Loss will be your friend. Bad Trades are common; your only friend reducing the damage is the Stop-Loss. So, use one, or the market will be greedy.
- The market can and will go lower — No one could have foreseen the huge impact the pandemic had on this world’s economies. Supply chains have been disrupted, economies have been stopped, and many businesses went out of business. 90% of new traders lose their capital in the first month because they underestimate the volatility or the risk of the market; many never used a Stop-Loss. Trading Crypto is anything from easy, but if you are dedicated to being successful and get a second chance on your trading career, us the Stop-Loss, you will not regret it. Moreover, beginners always think they must predict the market, do not be one of them. Predicting markets is rubbish—Trade what you see, not what you think.
- Trade what you see, not what you think — I wish I would have known this one earlier. Being new in space is very exciting. As soon as you realize how much money and potential there is in cryptocurrencies, you will probably never want to go back to the fiat currencies you came from. Please do not get too emotional about it while you trade, be clear, trade your strategy, and stick to it.
- Make mistakes — Without making bad trades, there is no learning. Make negative trades, lose some money, get a feeling of how the markets work, and try to learn from the mistakes you are making on the way. The best way is to screenshot every trade, review the trades after a few days or weeks, and assess your mistakes again and again. Be learning from your mistakes; you will prevent future mistakes. Successful traders know precisely when a trade is good to take or not. You can only get the hang of this if you do those mistakes repeatedly. By taking screenshots and judging yourself on your past misjudgments, you will see a fast improvement in your trading. To improve, you need money to trade with, so use a Stop-Loss to use the money to learn and not to waste.
- Take your time — Learning to use a Stop-Loss in a volatile market such as the cryptocurrency market is not easy. Use it as often as possible and find out which values work best with your strategy. Try to adapt too. Finding the perfect spot to place a Stop-Loss will never exist. Markets move unpredictably, so wrongly placed Stop-Losses will happen. Try to place your Stop-Loss with the thinking: “how much can I afford to lose?”. By limiting yourself through this thought, you will not be able to trick yourself into changing the value again due to misjudgment or FOMO (fear of missing out).
To conclude, trading is risky; using a Stop-Loss is reducing that risk. It reduces your risk to a factor that you can lose. Using no Stop-Loss will stop you out at zero. Moreover, Stop-Loss knows no emotion. Getting out of an investment that makes an unpredicted move is never a bad thing. Opportunities for gain further down the path might open a new entry, and securing profits is more fun than being pissed about losses. Both are trading. Changing the probability of one can have a massive impact on your success rate.