Risk Management in Crypto Trading - The Buy Stop Order and The Sell Stop Order

Buy Stop Order

A buy stop is simply a type of buy order trading that allows a trader to set a trigger condition that only buys a specific cryptocurrency at a particular price point that is higher than the market price. Once the condition is met, it would trigger the buy order to be filled. In normal sense, it is not possible for a trader to buy a cryptocurrency above the market price because exchanges have a system that automatically fills orders with the best price. With a buy stop, anyone can buy a coin at higher price than the market price.

The logic behind this type of order is that, at the market price, the price of that coin could fall and the trader would be at a loss. This is the benefit of a buy stop order because when the price of that cryptocurrency increases and triggers the buy stop condition, it means that there is an upward momentum going on and there is a higher probability that the price would increase higher than the entry price, which means that the trader would be in profit and continue to increase profit if the price continues in that upward direction.

Sell Stop Order

A sell stop is simply a type of stop loss order trading that allows a trader to set a trigger condition that only sells a specific cryptocurrency at a particular price point that is lower than the entry price. Once the condition is met, it would trigger the sell stop order to be filled. In normal sense, no trader wants to sell at a lower price than the entry. However, sell stop is used as a risk management strategy to help limit the loss in trading. With a sell stop, a trader can buy a coin at a certain price and set the sell stop lower than the entry price, so that if the price starts dropping after buying, the trader would only lose a small fraction of the capital depending on the sell stop position.

The logic behind this type of order is that, at the entry price, the trader has forecasted that the price would increase. However, since nothing is certain in the crypto space, the trader is smart and wants to protect his capital so as not to lose everything if the price starts dropping lower and lower. This would trigger the sell stop order. The trader would only lose a small percentage of the capital and have some capital left for another trading.