What does Stop Loss Mean? How do I calculate the Spread? — Quick Guide 2/3

Stop Loss, Spread and eight other words you must know

From Top Profit (TP) to HODL and Spread: Thousands of novice investors put their savings in cryptocurrencies every day, only to realise they have no clue what these words mean. Not to worry: We’ve all been there! Enjoy the second, expanded chapter of our free Quick Guide to Crypto › (pdf).

Today we’ll cover the Top 10 Words Every Trader Should Know. May this post help you to invest wisely! Continue reading below the jump…

 

 

 

Our Quick Guide explains the 10 most-used words briefly, but you’ll learn a lot more in this post as we’ve included examples and we get to share our personal “do’s and don’ts”. We’ll be using eToro as a reference.

 

1. PORTFOLIO

Probably the easiest to explain: Your portfolio is made up of all currencies you invested in. When talking about their portfolio, people refer to their current investments. This is what my portfolio du jour looks like:

 

 

2. SHORT-TERM (also: short run)

Let’s say you invest $500 in XRP, because you’re convinced this is the hottest coin of the moment. You anticipate its value in the next four days will increase by 30%, giving you a nice $150 return on investment (ROI). We’re not taking into account the Spread and the withdrawal fees. This means you’re not in it for the long run, which could give you a much bigger ROI. Instead, you focus on a short-term gain, like $150 in just a few days. Short-term is usually anything between 24 hours and a week, although there are no official definitions. Bear in mind that some people consider a month “short”, whereas others would file that under “long”. Which leads us to the following…

 

3. LONG-TERM (also: long run)

Keeping a cryptocurrency in your portfolio for, let’s say, three months or more can be considered a long-term investment. Some may argue “long” only starts after a whole year, but again – there are no clear definitions. The consensus seems to be that three months is the minimum for “going long”. Why would you hold onto your cryptocurrency? Well, if you invested at the right time (meaning: when prices were low, like during a big dip), you should see a greater ROI when keeping the currency in your portfolio for at least a year. Think of an ROI of 1000% or more. The aforementioned $500 yields $5000 profit. All that is required is patience and well-configured Stop Loss and Top Profit (see below for more information).

 

4. SPREAD

This one’s a real pain for many investors: Every trading platform takes a fee for everything you do. Whether you’re placing an order or are withdrawing money, they have rents and people to take care of, so you’ll have to pay. Two things to keep in mind:

  1. The Spread is the difference between the selling (bid) and buy (ask) prices. See example below
  2. Spreads are usually higher on the weekend and/or when the market is extremely volatile (e.g. swings of -5% to +8% within a few hours)

How to calculate a spread:

 

 

Buying price / selling price = Spread
So: 2.3391/2.2340 = 1,047

The spread is 4,7%.
Why is this important? Because in this example the broker (like eToro) will make 4,7% on your bottom line when you close a position. Made $150 profit? That’s great, but don’t forget to subtract the Spread – you’ll end up with an actual profit of $142,95. Doesn’t sound too bad, until you realise the Spread also applies to profits as high as $10.000..!

 

5. LEVERAGE

Risk level sounds a lot less enticing than leverage, but it really is the same thing. How much risk are you willing to take?  Choosing a leverage, although currently disabled for cryptocurrency on most exchanges, means you are basically borrowing money from the broker. If your investment is $500 but your leverage is 10x, you are actually investing $5000. If you win, the loan + fees will automatically get deducted from your profit. but if you lose, you still need to repay the loan (yikes!) + fees. Leverage? A word of advice: Don’t.

TIP: Only use leverage if you know what you are doing and are willing to lose all of your investment + more.

 

 

6. STOP LOSS (SL)

This is the most important term you should know by heart. It’s the first thing you check before opening a position. You’ll want to maximise your Stop Loss (SL) level to -100% of your investment so that your position can take a beating! No market is as volatile as the cryptocurrency market: Prepare your positions to move up and down with the currents.

Here’s a real-life example: The crypto market crashed with -30% on Friday 22 December. Many people lost thousands of dollars because they never bothered to set their SL at -100%. Instead, they wanted the safety mechanism (in other words: a forced closing) once the value reached a bottom threshold. Let’s say you set your SL at -25%. This means you want the position to be closed automatically once the value of your precious coins decreases with 25% or more. What happens to your investment when the market decides to go down with 30%, even if it’s just for a couple of hours? That’s right – you lose big time. You just guaranteed yourself a loss of 25%.

“Yes, but I saved the remaining 75% of my investment!”

Great job – except the market got back on its feet on Saturday, and if you had set your SL at -100%, nothing would have happened to your position. So go ahead and maximise your Stop Loss by -100%. It is virtually impossible for your investment to lose ALL of its value overnight! Next time cryptocurrencies start acting op, dropping 20% or more, you can sit back and watch the show: Your investments are safe. Now, this is what your next configuration should look like:

 

 

In this example, I am about to invest $500, with 1x leverage. I set my SL at -500, my entire investment. I put my Top Profit at +500, double my entire investment. Which brings us to…

 

7. TOP PROFIT (Take Profit / TP)

Often overlooked because the effects are considered less dramatic than a loss: Top Profit (TP). This is the maximum amount of money you are willing to take home. Excuse me? Are you telling me you want to cap your profit? Because that’s exactly what this means: Put in a max value and your position will close automatically once it reaches said value. Many people mistake TP with safety:

“At least then I know what I’ll get”.

Sure, fair argument – if it weren’t for the fact you could gain a lot more! The same people are eager to set their SL at -10% (“So I can only lose a tenth of what I put in”). We can only say: Crypto trading is not for you. Put your TP on max (+1000%) and be your own boss. Putting a TP of 300% is like saying “I’m only worthy of a bit of profit”. Hells no – you’re worth the full 1000% !

 

8. BULLISH (Bull run)

Although the analogy of a charging bull is understandable, we think “manic climb” would have been just as apt to describe a strong, upward buying trend. A bullish market (also called bull run) is a situation where the demand, or purchase orders, for a certain currency keeps increasing. We have seen it in the past with Bitcoin and Ethereum and we’ve experienced the same with XRP Ripple in December 2017: The price per coin went from $0,23 to $1,23 almost overnight.

Word of advice: Do not get infatuated with the proverbial bull run. You don’t buy when the market is bullish! You wait until the price drops by 10% or more. What goes up must come down.

 

9. HOLD (also HODL)

What’s the difference between Hold and Hodl? There isn’t: The latter is just a misspelt form of “hold”, and like so many things on the internet, it became a cult term. HOLD is used as a word of encouragement when cryptocurrencies are losing ground. They’re basically yelling

“HODL! Don’t sell – this too shall pass”

As explained in the section about Stop Loss, holding on to your position is usually the smartest choice. The only way is up, you just got to have some faith!

 

10. TO THE MOON

Another popular expression among crypto traders: Ethereum (ETH) is going to the moon! Whenever a currency has a good day, let’s say an increase of 10% or more, your fellow investors will tell you this coin is going places. Our advice: Ignore those who yell “to the moon”. What goes up… Indeed.

Be aware trading comes with risks: Stay sober, do your own research, don’t use leverage, set your SL at -100% and your TP at +1000%.

 

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Don’t forget to check out our Top 10 Cryptocurrencies of 2018 ›

2 Responses

  1. […] your research before you invested your hard-earned savings, you should have (and keep!) faith in your portfolio. Don’t get distracted by all the self-proclaimed experts, don’t believe anything you […]

  2. […] sell in green, but keep in mind the spread and possible withdrawal […]

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