Stop losses are simple tools that traders can use to set predetermined exit points. However, do not be fooled by its simplicity. When implemented effectively, stop losses can help protect your capital and minimize your risk in the crypto markets. So what is a good stop loss percentage to set when trading in crypto?
A stop loss that is too tight may lead to premature exits while a stop loss that is too wide could result in substantial losses. In this article, we will take a look at the factors to consider when deciding on what is a good stop loss percentage to set while trading in the crypto markets.
What Is An Acceptable Stop Loss Percentage
Managing risk and minimizing your losses in the crypto markets can have a significant positive effect on your portfolio. The table below illustrates how losses work geometrically against you.
The greater the loss, the greater the amount you have to achieve to get back to breakeven. When setting stop losses, make sure to set a stop loss that allows you to easily recover your losses if prices go against you.
What Does 10% Stop Loss Mean
A 10% stop loss means setting a stop loss 10% away from your entry price. 10% is often brought out as a percentage amount to set stop losses as the percentage allows you to get back to breakeven relatively easily. To recover from a 10% loss, you need an 11% gain to break even. However, if you suffer losses that stray further away from the 10% mark, the losses work more and more against you and it gets harder to claw back the losses just to break even.
A 50% loss would require a 100% gain just to break even! While a 100% gain is not impossible to achieve, these types of gains do not come by often. Furthermore, how much a crypto moves up in price is outside your control. What is however in your control is the amount of risk you choose to risk in the markets.
Every big loss starts as a small one. The only way to protect yourself from a large loss is to accept a small loss before it snowballs. Setting a 10% stop loss gives your position enough room to account for normal price fluctuations while minimizing your risk in the crypto markets.
What Is A Good Stop Loss Percentage For Crypto
There are two important factors to take into account when determining your stop loss percentage.
The first is to set your stop loss at a percentage that even if prices go against you and you get stopped out of your position, you can recover your losses relatively easily. The general rule of thumb is to set your stop loss no more than 10% away from your entry price as any further away from that would require you to achieve exponentially larger gains just to break even.
The second is to set your stop loss as a fraction of your average gains. For example, if your average gains in the crypto markets are 15%, you want to set your stop loss at half, a third or even a fifth of that amount. When you set your stop loss as a function of your average gains, you ensure that you have a favourable risk-to-reward ratio. A favourable risk-to-reward ratio provides you room to factor in failure into your trading. Using the earlier example, if your average gains are 15% and you use stop losses to limit your average losses to 7.5%, you can be right just once and wrong twice and still break even. If you limit your average losses even lower at 3%, you can be right just once and wrong five times and still not lose your capital!
A good stop loss percentage should ideally be set below 10% and as a fraction of your average gains.
A well-placed stop loss can be a valuable risk management tool for crypto traders. While we have shared what a good stop loss percentage to set in the crypto markets is, it is also essential to consider other factors such as market volatility, trading strategy, and risk tolerance. With these factors in mind, stop losses can assist you in navigating the markets and reducing your risk exposure as a crypto trader.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.