The market for cryptocurrencies is a big and volatile one. Its situation can turn good or bad pretty frequently, last year’s Bitcoin crashes being one of the examples. This leaves investors in a very precarious condition as one bad series of events can lead to sudden heavy losses. This is where the use of trading tools becomes important. Trading tools are important for volatile markets like that of Bitcoins–something that most investors have to learn the hard way. Today we will talk about one of the more important ones of them, Stop Loss.

Stop Loss is a type of trading tool which limits the greatest loss that can be incurred in a trade. This is done by automatically liquidating the assets once the market price reaches a certain specified value. The Stop Loss tool works with all the major exchanges such as GDAX (owned by Coinbase), Bittrex, or Binance. It can command them to automatically sell cryptocurrencies at a certain price or below.

Investopedia, the world's leading source of financial news, defines Stop Loss as an order placed with a broker to sell the specified security when it reaches a certain price point. These orders are designed to limit a trader's loss with security. Although the long position with stop-loss order is more popular, it can also be used with a short position. There, the security gets bought if the trade is above a defined price point.

Stop Loss can be utilized by a trader to not only limit their losses during instability in the market but can also be strategized to maximize their profits from it. But this will need a sort of intuitiveness on the trader’s behalf. They must successfully gauge the situation of the market and predict its next move. To have control over such unstable circumstances, Stop Loss has 3 different types of orders which can be utilized as per needs while crypto trading.

These 3 orders of Stop Loss, by their definition, are:

Full Stop Loss: 

As the name suggests, it is when a trader fully liquidates all their assets. Used in the case of sudden price fluctuations in an otherwise stable market, Full Stop Loss is a very limiting order.

Though it will stop any more losses for the trader beyond a set point, it also won't benefit them with anything in case of a sudden surge back up. So the trader must consider the risk and reward of both scenarios before implementing it.

Partial Stop Loss: 

It is when only a specified part of the assets is liquidated. Mostly done in highly volatile markets like cryptocurrency, it ensures that the traders may still have some assets remaining with them if the prices drop before a surge.

But this can be problematic in case there is no resurgent in the market and may leave the traders with unwanted assets and losses. Traders are thus warned against the high risks involved with Partial Stop Loss.

Trailing Stop Loss:

It has an advantage over the other 2 types, i.e. its ability to adjust according to the market fluctuations. The trader can set a trailing distance, which acts as the difference between the current asset price and the stop loss value. The rise in the price of the cryptocurrency will make the stop loss value rise, and it won’t change in case of a price drop. A stop-loss value is triggered when the stated value is reached.

Like others, this stop loss also has its own drawbacks like becoming a liability in a steadily rising market, as strong rising trends often drop before continuing to grow. Assets could even be liquidated before the price has reached its upper limit in case of a low trailing distance.

The whole Stop Loss in Crypto Trading system has other drawbacks too. A lot of industry experts feel it's something used by inexperienced traders in an inefficient way. It could also be misleading and can multiply the losses if not properly used. While these arguments are true to some extent, it’s also true that Stop Loss is an invaluable tool in the hands of an experienced trader. Its success depends on who uses it and how.

The important point is that Stop Loss can indeed control assets in times of market fluctuations and save time and money for a trader in many different ways. Risk-reward is a key factor that must be considered by all traders.