4 stop-loss strategies I use to protect profits and minimize risk

One of the most devastating mistakes a new trader can make is not setting a stop-loss order. This usually happens because new traders like to think they know exactly what the market is about to do.

Why else would they have taken the trade in the first place?

Consistently profitable traders on the other hand never enter a trade without a stop-loss. They understand that the market is completely unpredictable and they have peace of mind while not being glued to the price chart for hours on end.

Why set a stop?

Simply put, not having a stop-loss means you aren’t planning your trade. Without a stop-loss, you risk losing everything because the truth is no matter how good of an analyst you might be, anything can happen and you can’t predict the unpredictable.

Importance of a stop-loss order trading explained.
Consistently profitable traders use a stop-loss because they know the market is unpredictable.

Think of a stop-loss order as an insurance policy on your trade. There are fees and slippage that come with using a stop-loss, I consider these expenses the “insurance premium” or “cost of doing business” to enter a trade.

Stop orders take the emotion out of trading because they execute when told without hesitation. Here are 4 simple ways I use them to protect profits and minimize risk when trading cryptocurrencies:

1. Basic Swing Stop

Let’s start with my basic stop-loss strategy, the swing stop. This strategy takes into account the most recent swing low (or high) as a reference.

Basic Swing Stop-Loss Trading Strategy
Basic Swing Stop-Loss Trading Strategy

The problem with this strategy is that its very common, hence the name “basic” swing stop, and placing your order at a predictable point makes you an easy target for a stop hunt. When using this strategy I will tend to position myself outside of these predictable ranges or use a laddered stop.

2. Ladder Stop

The ladder-stop utilizes multiple small stop-losses that gradually increase past the predictable range. In this case, if there is a stop hunt before a major pump, your entire position doesn’t get wiped out, saving you fees and requiring less to re-enter.

Ladder stop-loss trading strategy.
Ladder stop-loss trading strategy. Invert for bear markets.

3. Trailing Stop

My favorite stop-loss strategy is the trailing stop, which as the name implies “trails” the price action once in the profitable range. I will usually set a basic swing stop or laddered stop immediately after entering a position and move it to a break even point after the trade is in profit.

Trailing Stop-Loss Trading Strategy.
Trailing Stop-Loss Trading Strategy. Invert for Bear Markets.

I will continue to move the order up as the trade becomes more profitable. If I get stopped out, I can re-enter at a better price or just keep my profit and move on to the next trade.

4. Timed Stop

This strategy is based on time rather than price. For example, I may go long at a major support point but after a few days if the price hasn’t moved, I exit the trade.

Timed Stop-Loss Trading Strategy.
Timed Stop-Loss Trading Strategy. Invert for bear markets.

Timed stops are not a typical strategy of mine, but I do use them on longer-term trades when an asset is approaching an significant announcement date or roadmap achievement.

Bottom Line

As you can see, there are many different ways to implement the stop-loss order and the strategies in this article only begin to scratch the surface. You can apply these principles to technical indicators, moving averages, and more.

Many small crypto exchanges do not offer stop-loss orders as part of their trading platform. In these cases, it is advisable to keep a mental stop and use an app like Blockfolio to alert you when to buy or sell. The downside is you may not be able to reach your trading station when you need to execute an order, like when you are sleeping for example.

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