1. Stop loss order
It is important to define exactly how you will limit your trading risk. Stop-loss orders are designed to limit losses on a token position. For long positions, the stop loss can be placed below the recent low, while for short positions it can be placed above the recent high. It can also be based on volatility.
For example, if the BTC price is moving about $10 per minute, then you could place a stop loss order $100 away from your entry point to give the price some room to move before it moves in the direction you expect.
In the case of a triangle pattern, a stop-loss order can be placed at $100 below the recent swing low, or $100 below the pattern if a buy breakout occurs.
You can also set two stop-loss orders:
Actual stop-loss orders at price levels that suit your risk tolerance. Essentially, this level represents the maximum amount of money you can afford to lose.
Place psychological stop orders where entry criteria are violated. If a trade takes an unexpected turn, you will close your position immediately.
Regardless of your decision to exit a trade, your exit criteria must be specific enough to be testable and repeatable.
2. Set financial loss limits
It is wise to set a maximum daily loss that you can afford. Whenever you reach this point, exit your trade and take a day off. Stick to your plan. After all, tomorrow is another (trading) day.
3. Test your strategy
You have defined how to enter the trade and where you will place your stop loss order. Now you can evaluate whether a potential strategy meets your risk limits. If the strategy exposes you to too much risk, you need to change it in some way to reduce the risk.
If the strategy is within your risk limits, testing begins. Manually browse historical charts to find entry points that match yours. Pay attention to whether your stop loss order or price target will be hit. Make at least 50 to 100 paper trades this way. Determine whether the strategy will be profitable and whether the results will match your expectations.
If your strategy works, continue trading live in the demo account. If you make profits over the course of two months or more in a simulated environment, continue day trading with real capital. If the strategy is unprofitable, start over.
Finally, remember that if you trade on margin, you may be more susceptible to wild price swings, so it is crucial to use stop-loss orders when day trading on margin.
