A stop-loss is an advanced order that is used by traders to prevent additional losses. When a specific price point is met, the order is triggered.
As the market experiences a pull-back, a stop-loss can trigger to trade funds out of the current position. Due to the volatility of the cryptocurrency market, stop-losses have become a staple feature for nearly every trading service.
Although stop-losses are often used by traders to manage a strategy across a single market pair, the remainder of the discussion will center around the idea of a portfolio stop-loss. When we say “portfolio stop-loss”, we are referring to the entire portfolio of assets currently held by the investor.
Rather than being concerned with each individual asset, portfolio stop-losses pull the entire portfolio out of the market when a stop-loss is triggered.
The funds that were held in the portfolio will all be converted to a stable currency or coins like USDT. Completely pulling the portfolio out of the market reduces the risk of a portfolio continuing to drop as the market declines.
Example: Let’s consider the case where you have a portfolio of assets that have been performing well. The entire portfolio has maintained a positive performance throughout a full week.
If we begin to suspect a pull-back is coming, we can set a stop-loss to prevent our portfolio from going down with the market.
In this case, we can set a stop-loss for -5% over a 1-day period. That means if the portfolio begins to lose value, the entire portfolio will be traded to USDT when the value declines by 5% in less than a day.
Shrimpy is a social portfolio management service that allows traders to leverage a portfolio stop-loss, among other features.
Unlike a stop-loss for individual trading pairs, a portfolio stop-loss will track the value changes of the entire portfolio. When the stop-loss threshold is passed, the entire portfolio will be sold for a single stable asset.
There are two primary cases where a stop-loss becomes valuable. The first is to capture profits and the other is to prevent losses.
Capturing profits will look like the example above. In this illustration, we have set a stop-loss threshold of +5%.
As the performance of your portfolio increases, the stop-loss will not be triggered. Since the performance progressed from under the threshold to above the threshold, this suggests the performance may continue to climb. It would be ideal to let the performance to continue climbing before we trigger the stop-loss.
Once the performance begins to decline, we can see the stop-loss threshold is crossed from above the black line to below the line. This indicates the stop loss should be triggered and all funds should be sold to a stable currency.
Notice how the stop-loss is not triggered on the way up, it is only triggered on the way down. The reason we only trigger on the way down is because triggering on the way up will cap the value you can capture from a run without allowing the winning streak to continue.
Loss prevention allows you to prevent your portfolio from continuing to fall as the market drops. This is exceptionally useful for flash crashes and other times when the market may decline in value a significant amount.
A recent example of a drastic crash in the market was on March 12th, 2020, when the entire market dropped by nearly 50%. A strategic stop-loss placed at -5% would have limited the portfolio losses to only -5% rather than -50%.
Similar to capturing profits, the stop-loss for loss prevention is triggered on the way down. As the portfolio performance declines, as soon as the threshold has been crossed from above the black line to below the line, a stop-loss will be executed.
On the “Automation” page in Shrimpy, we can set up our stop-loss to automatically trigger when a threshold is met.
Time Period
The time period defines the length of time that is evaluated for the stop-loss. A time period of one day would mean Shrimpy will evaluate the last one day of portfolio performance to determine if the stop-loss should trigger.
Threshold
The threshold is the percent at which the stop-loss is triggered. This threshold is applied over the time period that is specified in the previous box. A threshold of -5% with a time period of one day would mean the stop-loss will trigger when the value of the portfolio decreases by 5% in one day.
Currency
The currency is the asset that will be purchased when the stop-loss is triggered. Every asset in the portfolio will be sold to buy this asset during a stop-loss. The selection of currencies is limited to only stablecoins and fiat currencies.
In Shrimpy, once the stop-loss has been triggered, the automation will stop. That means the entire automation will be completely disconnected from your portfolio after the funds are all traded to your stablecoin.
In order to resume trading, you must re-select an automation you would like to trade for your portfolio and once again select "Start Automation". This will resume the trading process for your portfolio.
In Shrimpy, stop-losses don’t only need to be automated. If you’re ever concerned about the market and want to quickly remove your portfolio from your allocations into a stable currency, you can select to “Stop Loss Now” on the Shrimpy dashboard.
This will immediately execute a stop-loss for your portfolio and pull all of the funds out of the market into the selected stable currency.
Note: You must have a stop-loss configured in your automation in order to use the on-demand stop-loss feature.
The crypto market is unpredictable. When a stop-loss triggers for your portfolio, it’s important for you to know.
This update comes with an email notification whenever a portfolio stop-loss is triggered on your account. That way you can keep up to date on the state of your portfolio and immediately check your portfolio when a stop-loss is triggered.
The following example scenarios will provide an overview of how the stop-loss feature will function under different settings and scenarios.
Settings
Scenario
We will start our examples with the easiest example. If you have a 1-day time period set for your stop-loss, we can use the performance calculated on the Shrimpy dashboard as a guide.
A threshold of -5% means that as soon as your portfolio loses 5% of its value in 24 hours, Shrimpy will execute a stop-loss. To better understand how this performance is calculated, we can go to our dashboard and select the option for “Day” performance.
On the right side of your dashboard graph, you can see the percent performance “Since Yesterday”. This value is calculated the same way we calculate the stop-loss. If this value says -5%, that means the stop-loss will trigger, since your portfolio has dropped by 5% of its value in 24 hours.
Notice how we calculate this value by taking the current value of the portfolio and comparing it to the value of your portfolio 24 hours ago. We don’t evaluate the movements of the market between these two data points. However, Shrimpy will use the time-weighted rate of return to remove the impact of deposits and withdrawals.
Once the stop-loss is triggered, the entire portfolio will be sold to USD in this example.
Settings
Scenario
To trigger a stop-loss with a 1-hour time period and -10% threshold, the value of your portfolio will need to drop by 10% in one hour. That means if your portfolio falls by 5% for every hour for 24 hours, the stop-loss will not be triggered.
The performance is calculated by taking the value of the portfolio one hour ago and comparing it to the current value of the portfolio. Shrimpy will use the time-weighted rate of return to remove the impact of deposits and withdrawals.
As soon as the portfolio drops by 10% in one hour or less, Shrimpy will sell 100% of the portfolio into USDT using taker limit orders.
Settings
Scenario
To trigger a stop-loss with these settings, your Shrimpy portfolio will first need to rise in value by more than 15% in 4 days before it can trigger the threshold on the way back down.
As an example, let’s say we have a portfolio of $100. If the value of this portfolio rose to $120, Shrimpy will not trigger on the way up. Shrimpy will allow the portfolio to continue gaining in value. However, once the value starts going down, it will trigger a stop-loss once we reach $115 in portfolio value. This is equivalent to our 15% threshold.
The 15% increase in portfolio value needs to happen in 4 days, otherwise, the threshold won’t be crossed when it starts to decline again. That means if our portfolio increases in value by 6% each day for 3 days in a row, we would have a portfolio performance of more than 15% over those 3 days. Then, if our portfolio experienced a 6% drop in value on the 4th day, Shrimpy would stop-the value from dropping below the 15% performance gain threshold.
Once the stop-loss is triggered, the entire portfolio will be sold to EUR.
Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. And joining them is easy.
After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes.
Whether you create your own rebalancing strategy or completely custom automation, the ability to walk your own path belongs in the hands of every crypto investor.
Discover 5 popular alternatives to Robinhood and decide which app you should start investing with in 2023.
Dive into automated crypto investing. Learn how it works, its advantages, potential risks, and top platforms for your investment journey.
A crypto robo-advisor is a platform that manages your cryptocurrency portfolio automatically. Here are 5 robo-advisors to use in 2023.