How To Calculate Stop Loss In Crypto Trading

Why Stop-Loss Orders Matter in Crypto

Cryptocurrency prices can swing 5 – 20 % in a single session. Without a well-defined exit, small pullbacks can spiral into portfolio-crippling drawdowns. A stop-loss order—an automated trigger that closes your position at a pre-set level—keeps losses contained and enforces discipline, whether you scalp intraday moves or invest for the long haul.

How a Crypto Stop Loss Works

A stop-loss is placed below the entry price for a long trade or above it for a short trade. When the market touches that level, your exchange converts the instruction into a market or limit order and flattens the position. By setting the threshold before you enter the trade, you lock in a maximum risk amount and eliminate emotional decision-making.

Where To Set Your Stop Loss For Crypto Trading

There are three main ways that you can use to set your stop losses.

1. Percentage-Based Stops

Set a fixed percentage of your entry price. For example, buying XRP at $0.7061 with a 10 % stop means selling if price drops to $0.6355. This is simple, scalable, and ideal for high-volatility pairs.

2. Dollar-Amount Stops

Define the most you are willing to lose in fiat terms (e.g., $500). Divide that by position size to locate the stop level. This keeps each trade’s dollar risk constant, protecting total account equity.

3. Price-Action Stops

Setting your stop loss based on price action refers to a decision to set stop losses by observing the movement of a crypto price rather than relying solely on fixed percentages or specific numerical values. This approach relies on traders to analyze the price chart and identify key support and resistance levels, moving averages or previous price lows.

Support and Resistance Levels: Support levels are price points at which an asset historically tends to find buying demand and prices bounce back up, while resistance levels are levels at which selling pressure tends to increase and prices fall back down.

Placing a stop loss just below a support level (for long positions) or just above a resistance level (for short positions) is a way to protect against potential breakdowns or breakouts that could result in larger losses.

Moving Averages: Moving averages are trend-following indicators that smooth out price data over a specific period. Traders often use moving averages as dynamic support or resistance levels.

Placing a stop loss just below a moving average (for long positions) or just above it (for short positions) can help traders exit a trade if the price breaks through the moving average, signaling a potential trend reversal.

Previous Price Lows: Placing stop losses below previous price lows (for long positions) or above previous price highs (for short positions) is a stop loss method that takes historical price action into account. If prices return to these levels, it might suggest a change in the trend or momentum.

The primary advantage of setting stop losses in these strategic locations is that it provides a clear exit plan based on technical analysis.

Say you buy XRP at $0.7066. Based on the recent price action, you can set a stop loss below the recent price lows at $0.6659.

The effective implementation of stop losses in your trading strategy can help you navigate the crypto markets with confidence, allowing you to seize opportunities while minimizing risk. But it is important to remember that no strategy is foolproof, and there is always a risk of price fluctuations and market volatility. Traders should adjust their stop loss levels based on their risk tolerance and market conditions.

Advanced Stop-Loss Techniques

Step-by-Step: How To Calculate Stop Loss In Crypto

Calculating your stop loss requires the following :

1) Entry price

The price at which you enter your position.

2) Percentage/dollar amount of risk

The percentage or dollar amount that you stand to lose if prices go against your trade position.

These are the formulas on how to calculate your stop loss:

Long position: Entry price - (percentage/dollar amount of risk)

If you entered a long position in Bitcoin (BTC) at $40,000 and are only willing to risk 7% on that position, your stop loss will be set at the $37,200 ($40,000 - (7% x $40,000) price level. If BTC prices fall, the maximum amount you would lose is 7% of your initial position.

If you decide to risk a dollar amount instead, say $1,000, you would set your stop loss at $39,000 ($40,000 - $1,000).

Short position: Entry price + (percentage/dollar amount of risk)

On the other hand, if you decide to take a short position in BTC, with the same $40,000 entry price and 7% risk level, your stop loss will be set at the $42,800 ($40,000 + 7% x $40,000) price level. If BTC prices rise, the maximum amount you would lose will be 7% of your initial position.

If you decide to risk a dollar amount of $1,000, you would set your stop loss at $41,000 ($40,000 + $1,000).

Quick Stop Loss Calculator Crypto (Excel & Google Sheets)

Cell A1 = Entry Price Long Stop %: =A1*(1-0.07) Short Stop %: =A1*(1+0.07)

Replace 0.07 with your chosen percentage.

Best Practices & Common Pitfalls

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.