Simple guide to setting Stop-Losses

What’s up, my friends.
TraderTyler here, also known as the only dude in the cryptosphere that writes articles by not stretching 2 sentences into a full on PHD-worthy scientific paper, teaching you the basics to stop-losses.

Let’s get it.

As the name suggests, this type of order is used to prevent a trader from losing absurd amounts of money on a trade.

The general point of a stop loss for a trader is to exit out of a trade as soon as the market proves the trader wrong.

Being disciplined about using stop-losses on each and every one of your trades also prevents you from being a ‘HODLer’ when you enter a losing trade.

• The point is you want to be flexible and not be stuck in a losing trade.
• Cutting losses quickly and MOVING ON

How to start using a stop-loss.

We’ll cover many examples but first let’s see where and how we determine a stop whilst charting a trading set-up.

Example of a set-up on KEY

Where the stop loss was placed and where the target was.

Using simple Technical Analysis, I have now determined my Stop-Loss, my target and my entry. Only NOW will I go and determine my position size…

A trader’s stop loss should be based on technical analysis.

To me, what determines my position size is the risk I am willing to take.
There is a formula you can follow using the following variables.

POSITION SIZING

• Risk per trade: what percentage of TOTAL PORTFOLIO a trader is willing to lose per trade
• Position size: number of units of an asset one purchases
• Distance to stop loss from entry: Self-explanatory, you can even see it in the chart, it’s the red line.

FORMULA FOR POSITION SIZING

(Total portfolio x Risk per trade) / Distance to stop loss from entry

Ex. (100 x 0.03) / 0.05 = 60

Please do notice: A trader using this formula has now determined that his trade will be 60$ worth of his portfolio, which is quite large, yet he has utterly minimized his risk and feels no anxiety going into the trade as the trader has set up by knowing his risk and potential profits.

The only thing left for the trader is to execute it and let the market do its job for him.

You might have noticed that I pointed out the obvious liquidity pool, why?
We have all encountered the following issue…

My stop got hit yet the market reversed after filling, it keeps happening!

The most common problem with stop-losses and why many don’t use them is because there is a chance your stop gets hit only for you to see the market reverse and rally — slapping you in your face and leaving without you.

A simple liquidity pool, be careful, not every swing high/low is a pool.

To read more about liquidity pools I explain them more thoroughly in my article → Best guide to trading barts you will EVER see.

There are certain principals you must follow while searching for an exit.

Stop-loss principles.

• A trader’s stop loss should be placed at the level at which your trade does not make sense anymore and is proven wrong by the markets. Your stop-loss is found through Technical Analysis.
• Fixed percentages for stop-losses are impossible because EVERY moment in the market is unique, it’s a horrible strategy.
• BEFORE EVERY TRADE YOU MUST KNOW YOUR EXITS AND TARGETS.

Setting a stop-loss too tight.

Many traders set their stop very tight and their target far off then take one look at the Risk/Reward and say “Oh man what a great trade.”
Later their stop gets triggered and the market continues without them, the trader, missing out on profits as he was too scared entering.

A tight stop-loss is either used whilst betting on a reversal in that moment and wanting to leave the trade as soon as you’re proven slightly wrong OR it’s used in a very volatile market and again, you want to leave ASAP if shit hits the fan.

Let’s look at one example of a bad tight stop-loss from a trade I took some 2 weeks ago.

VERY bad stop.

My reasoning/excuse behind the stop placement was that I was expecting a very volatile move soon, which is why I wanted to leave quickly if it went the wrong way.

Here is how I should have placed it..

So I’m placing it ON THE WAY to the obvious swing high.

This is much, much better. And pulling out a calculator confirms my good stop placement as the Risk/Reward was still a very good 3, compared to the bad placement which made it an 8R trade — A trade with a better risk/reward of course, but your R doesn’t matter shit if your stop placement is wack.

Conclusion:

Like trading, charting and waking up in the morning — Setting a stop-loss is very simple, the only hard bit is actually putting effort into PLANNING your trade instead of just entering because it ‘looks good’.

Cut your losers quickly, be grateful you can set a stop-loss.

BONUS TIP

Setting a stop on binance.

Always set your LIMIT sell order slightly under your STOP order, otherwise the market might ignore you and not give you a fill.

Sources:

I recommend watching CryptoCred’s videos on the topic and reading the following article: → 5 Stop Loss Mistakes To Avoid

Watch the following video → Risk Management — Technical Analysis Series

Shoutout to @traderdante @trader1sz @cryptocred and @caneofc — these are their twitter handles, many helpful posts, incredible analysis and great shitposts from these mates.

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