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.
Portfolio Stop-Loss
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.
Stop-Loss in Shrimpy
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.
Capture Profits
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
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.
Setting Up a Stop-Loss
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.
Resume Trading
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.
Stop-Loss On-Demand
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.
Email Notification
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.
Things to Know
- The stop-loss is evaluated every 1-minute. That means on a 1-minute interval, Shrimpy will check to see if your threshold has been crossed to trigger the portfolio stop-loss.
- The performance calculation for determining when the threshold is crossed is based on the USD performance of the portfolio. It is not based on the BTC performance.
- In the “currency” drop-down for the stop-loss, the “Recommended” currency is the stablecoin with the highest liquidity. Be cautious about selecting a stablecoin with low liquidity. High volume trades on some trading pairs can result in high spreads and slippage.
- The maximum time period you can select is 30 days. We do not support evaluation periods that are longer than 30 days.
- Users can input positive or negative thresholds. In both cases, the stop-loss will only trigger when the threshold is crossed from above the threshold to below the threshold.
- A stop-loss will always use taker trades. Even if you have “Fee Optimization with Maker Trades” enabled. The reason we only use taker trades is because a stop-loss needs to execute as quickly as possible. Maker trades execute too slowly for a stop-loss.
- A portfolio that has a triggered stop-loss will not execute rebalances any longer until you "Start Automation" once again.
- Depositing (or transferring) funds into a portfolio that has a triggered stop-loss will not trigger dollar-cost averaging. DCA will still operate normally when the stop-loss has not been triggered.
- When a social leader sets a stop-loss, all followers will execute a stop-loss at the same time as the leader. The performance calculation to determine when to trigger is not based on the portfolios of each follower, but only the portfolio of the leader.
- When a social leader sets a stop-loss, all followers will execute a stop-loss at the same time as the leader. The performance calculation to determine when to trigger is not based on the portfolios of each follower, but only the portfolio of the leader. Your portfolio will continue to follow the leader even after the stop-loss is triggered. (Please note: the social trading has a "Stop Follow" feature. This is not the same as a stop-loss. A stop-follow will stop following the leader)
- Users who have selected to exclude USDT from their index can still use USDT as the stop-loss currency. The stop-loss will execute as expected.
- Be cautious of the difference between a positive threshold and a negative threshold. A +10% threshold means your portfolio must first increase over 10% performance within the time period selected before it can cross on the way back down. A -10% threshold would mean if your portfolio falls by 10% in the time period, then it will trigger. Basically, you can think of it similar to the performance percent you see on the dashboard. If your dashboard goes from 0% performance to -10%, you want to trigger when it gets to -10%.
Example Settings & Scenarios
The following example scenarios will provide an overview of how the stop-loss feature will function under different settings and scenarios.
Example One
Settings
- Time Period: 1 days
- Threshold: -5%
- Currency: USD
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.
Example Two
Settings
- Time Period: 1 hour
- Threshold: -10%
- Currency: USDT
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.
Example Three
Settings
- Time Period: 4 days
- Threshold: 15%
- Currency: EUR
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.
As an experienced professional deeply involved in the cryptocurrency trading space, I can confidently delve into the concepts outlined in the provided article on stop-loss strategies, particularly as it pertains to Shrimpy, a social portfolio management service.
Stop-Loss Overview: A stop-loss is an advanced order utilized by traders to mitigate potential losses. It automatically triggers when a specific price point is reached, helping traders exit a position to prevent further losses. Given the volatility in the cryptocurrency market, stop-losses have become a vital tool for risk management.
Portfolio Stop-Loss: The article introduces the concept of a "portfolio stop-loss," which differs from a regular stop-loss by encompassing the entire portfolio of assets held by an investor. Instead of managing each individual asset, a portfolio stop-loss exits the entire portfolio when triggered, converting funds to a stable currency like USDT.
Shrimpy and Portfolio Stop-Loss: Shrimpy is presented as a social portfolio management service that facilitates portfolio stop-loss functionality. Unlike stop-losses for individual trading pairs, a portfolio stop-loss in Shrimpy tracks the overall value changes of the entire portfolio. This is particularly valuable in capturing profits and preventing losses.
Capture Profits: The article explains how setting a positive threshold, such as +5%, allows traders to capture profits. The stop-loss is triggered only when the performance declines below the specified threshold, preventing premature exits during potential upward trends.
Loss Prevention: Conversely, a negative threshold, like -5%, is employed for loss prevention. In cases of market downturns, the stop-loss is activated to limit losses. The article highlights the effectiveness of this approach during significant market crashes, citing the example of March 12th, 2020.
Setting Up a Stop-Loss in Shrimpy: The article provides insights into configuring a stop-loss in Shrimpy. Key parameters include the time period (evaluating performance), threshold percentage, and the currency to which the portfolio will be converted when the stop-loss is triggered.
Automation and Resuming Trading: Once a stop-loss is triggered in Shrimpy, the automation halts. To resume trading, users must re-select an automation and initiate it. The article emphasizes that a portfolio with a triggered stop-loss will not execute rebalances until automation is restarted.
On-Demand Stop-Loss: Shrimpy allows users to execute a stop-loss manually with the "Stop Loss Now" feature. This immediate action pulls funds out of the market into the selected stable currency.
Email Notifications: Acknowledging the unpredictable nature of the crypto market, the article highlights the importance of email notifications. Users receive alerts when a portfolio stop-loss is triggered, allowing them to stay informed about their portfolio's status.
Things to Know: The article provides additional insights and considerations, including the evaluation frequency, calculation based on USD performance, currency selection, and caution about low liquidity stablecoins.
Example Settings & Scenarios: The article concludes with illustrative examples of different stop-loss settings and scenarios, offering a practical understanding of how the feature functions under various conditions.
In summary, the article provides a comprehensive guide to stop-loss strategies, with a focus on portfolio stop-loss in the context of Shrimpy's platform, catering to both profit capture and loss prevention in cryptocurrency trading.
