The financial market is an environment that, in any case, will involve risks. This is how the market works, especially when it comes to cryptocurrency, which is an investment with more volatile assets and which, consequently, involves higher risks, both for profits and losses.
However, there are several ways to take precautions, or even try to avoid market risks . Stop loss and stop gain mechanisms are precisely that: tools to support investors and protect them from sudden changes in market prices.
But this is not exactly a very common tool to see in every brokerage, so it may raise doubts. Today we will show you everything you need to know to learn how to set up your operations with much more peace of mind and confidence.
What is Stop Loss?
The order is set to trigger the moment your asset reaches a certain value, which you previously defined as your loss limit. In other words, the minimum value at which you need to sell your asset before it becomes an irrecoverable loss.
Why is Stop Loss useful?
It is common, in the investment world, for the situation to change quickly and the asset you purchased begins to trend downwards. At this moment, it is necessary to keep a cool mind and take strategic actions to minimize the impacts of the loss.
Furthermore, there is a risk that this trend reversal will happen at a time when you are not away and offline , without being able to act at the same time. It could happen in the early hours of the morning, or even while you are at work. And to protect yourself even when the worst happens, there is a Stop Loss.
Check out a practical example:
Let’s assume you bought 10 coins worth R$5,000, currency M.
After doing your studies and graphical analysis, you understand that currency M has the capacity to fluctuate and reach R$7,000 on the way up and R$3,000 on the way down. And you also understand that it will be difficult for it to rise again and generate profits if it reaches R$7,000.
Did you understand that, for your objectives and according to your reality, if the currency reaches R$3,000 it is better to sell it and not run the risk of losing more while hoping for appreciation and watching the currency continue to fall in value .
So, you program your Stop Loss order to sell the 10 coins when M reaches the value of R$3,000.
Do you understand how important this type of mechanism is to mitigate investor risks and help them to have greater security when operating?
Especially for those who operate day trades or scalping trades , or even for those who maintain investments simultaneously with other professional activities.
What is Stop Gain?
Stop Gain is basically the opposite of Stop Loss: it is the maximum profit you want/can obtain by investing in a certain asset .
Therefore, when you start to understand the dynamics of the market, you also understand that always focusing on the profit of the best possible, almost utopian scenario, is the same thing as not having a strategy. It is betting on luck and behaving like a fanatical supporter of your asset.
That’s not exactly how things work, there is the volatility of assets and the natural movement of the market, up and down, which maintains the necessary balance for the asset to exist and investors to be able to continue buying and selling.
Especially with cryptocurrencies, which naturally have more intense price fluctuations than other financial assets, and are also strongly impacted by the behavior of the market and traders. If you don’t set the maximum profit for your trade, you are basically trading without direction , flying with the market.
Let’s look at another practical example:
In practice, Stop Gain works like this: let’s go back to the example of cryptocurrency M that was purchased for R$5,000.
After studying, analyzing graphically and monitoring the asset for a certain period of time, you saw that its maximum oscillation in an upward trend is up to R$7,000. If it goes beyond this value, you believe that the asset will reverse its trend and start to fall.
Therefore, you program the sell order for when the asset reaches this value of R$7,000.
How to place Stop loss and Stop gain orders?
Before setting up your investment strategy, you need to define your entry value, maximum profit value and minimum loss value.
Furthermore, it is important for you to understand that the execution of a stop order, as well as its configuration on the broker’s website, may vary.
There are ways to configure a simpler order, which will only rely on the trigger value, and there are ways to configure a more complex and advanced order, establishing the limit value and some other steps characteristic of a stop order.
But know that it is not essential to try to execute an advanced order right away, as new concepts may appear and confuse you. We only recommend executing an advanced order if you have more in-depth knowledge, both about the order and the mechanism, and about your asset and the investment market in general.
In any case, it is important to understand the concepts that may come up for you in a stop order setup. There are 4 main concepts that you should keep in mind when programming:
Trigger Value
This is the simplest concept. It is the value that, if reached, will automatically trigger your order, whether to sell or buy. It is the value that will trigger the programmed order.
This is the most common concept and setup found in simple stop orders.
Duration
This duration refers to how long you want the sell order to last. It is important to align this duration with your investment strategy.
If you usually operate in the short term, day trade and scalping trade, the duration should be shorter, but if you operate in the medium and long term, you should adjust the duration to weeks or months.
Loss Limit
This is the most common concept and configuration to find in advanced orders.
It is the value that you understand to be the minimum, or maximum in case of Stop Gain, that your asset can reach. How far can your risk go so that the investment is still worthwhile.
Stop Loss Loss Limit
You understand that currency M at R$3,000 is the value at which it is no longer performing well and may be in an irrecoverable decline. You program the stop loss sell order for this amount. But until that order is executed, what will your asset actually sell for?
It is interesting to think about the loss limit as the market fluctuates a lot, especially when it comes to cryptocurrencies. So, it may happen that you schedule the sale for a value X and the fluctuation does not even cover that value.
Experts recommend setting the loss limit at around 3% to 5% for those who operate in day trading or scalping, which are short-term operations. If you operate in the medium to long term, they recommend 10% to 15%.
Of course, this is just the opinion of outside experts. You are the best person to calculate your own loss limits that align with your strategy, your risk tolerance, and your reality as a trader.
Stop Gain Loss Limit
Just like with stop loss, with stop gain it can also happen that the asset appreciates so much that it goes straight past its stipulated trigger value.
To protect yourself from these events, you plan your stop gain loss limit, the maximum amount that the stock needs to be sold before entering a downward trend.
Skipped orders
What we explained earlier, about how market volatility can become so high that there is a chance that the asset will not even pass through its trigger value and will fluctuate directly to another value, is exactly what happens when an order is bounced. Setting a limit value can prevent this.
A bounced order is when this happens, such a large and sudden variation in the asset price that the trigger order doesn’t even happen, it gets “stuck” in the Order Book.
It’s as if it were waiting for the value to be reached again before it could be executed. This is unlikely to happen, and it’s more likely that you’ll later need to go back and cancel the order, which would jeopardize your entire strategy and serve no purpose in preventing the investor from losing money.
It is worth remembering that ordering the two sell orders, the trigger value and the limit value, does not result in additional costs for the investor, since only one of them will be executed, functioning as a normal sell order.
Advantages of Stop Loss and Stop Gain
The main advantages of this type of mechanism, as we said above in the text, is that it works as a way to protect the investor and support him when his assets undergo a trend reversal and possible decline.
It works, above all, to mitigate the investor’s losses and to allow him to follow his strategy from start to finish, without also needing to be available full-time for operations.
Emotional control during investments
One of the points we discuss a lot here on the Blog is how the human factor and traders’ psychological barriers are very incisive and have a high impact on traders’ strategies.
We know how delicate it is when we realize that our investments are not going according to what we imagined. We know that these things interfere with the psychology of those who are in control and carry strong emotions, so relying solely on their emotional control may not be enough.
This is where the stop loss comes in, to overcome the human factor, the entire emotional burden that operating in investments brings. This way, you avoid loss of control and ill-considered decisions.
Euphoria and profit expectations
Likewise, it can happen while the asset is in an upward trend, in a situation where the investor may become excited about the rise in the asset’s price and always wait for a new appreciation, in search of making even more profit.
But it is very common for an asset to reach a certain point and not be able to sustain that value for long, and at that point it begins to fall and depreciate. Therefore, the investor has lost the opportunity to sell it while still making a profit, before the asset begins to fall.
By relying on the Stop Gain mechanism, you can prevent yourself, be able to complete your strategy with a profit, and not fall into market temptations.
If, by chance, the asset continues to rise well beyond the value you defined, it is much better for you to finalize your strategy, following what you outlined at the beginning and start another with new entry values, loss and maximum profit, following the new movements. from the market.
However, it is also important to emphasize that knowing how to configure these orders does not in any way replace study, understanding of graphs, data and fundamental analysis, monitoring news and the movements of the main market players.
When it comes to cryptocurrencies, it is also essential to monitor the institutions responsible for issuing the coins and the big names that we see operating and supporting the coins.
On the contrary, the use of these mechanisms in conjunction with graphical analyzes and daily monitoring of the asset is recommended.