I wrote a few posts with scattered information about Binance Futures altcoin markets, and in each one I bang on about stop loss orders. I figured it's time to explain a bit more fully how to use them (well, how I use them anway).

DISCLAIMER: I am a bad trader. The only reason I still have any money is stop losses, and if I had a DOGE for every time I saw the price move to trigger my stop and then move back the way I wanted leaving me behind, I would have several DOGE by now. The point is that despite my lack of skill, I am still able to trade (and hopefully improve as a trader) because I set things up so I won't lose everything if I'm wrong.

Example: shorting LTC

This is a scalp short (as in 'this trade will be over in a hour, one way or the other).

NB: this is a silly short term trade, I'm just doing it as an example of how it works. I just pulled the levels out of thin air.

situation:

LTCUSDT Price on Futures is currently $70.80, the last wick up was $71.20 something, and I'm expecting it to dip.

I have $200 in my account.

deciding on the target and stop

The first thing I do is work out a target, and a stop, and decide if it's worth the risk

If the price goes above 71.30, (increase of $.50) Ill cut my losses.

And if it goes my way, I'll sell at 69.80 (decrease of $1).

So for each LTC I short,  I'm risking 50c and potentially gaining $1. That's a risk/reward of 2. 

My rule is : f the R:R of my planned trade is less than 1, I don't trade at all. I want at least 1.5. 2 is fine.

Sometimes the R is really high, like 5 or 10. That usually means I'm being wildly unrealistic :D

deciding on the position size

I will generally risk 1-2% on each trade. So with my bag of $200, I'm happy to lose $3.

With the trade above, and a loss per LTC of $0.5, that means I'd put on a position of  ( 3 / 0.5) = 6 LTC

So our final setup is going to look like this:

setting it up

So to do this, we need to place 3 orders. 

• the entry (the yellow line)
• the stop (the red line)
• the target (the orange line)

the entry

You can either place a sell order at a price, or use a market order (if the price is where you want it). I'm doing a market order, but be wary that this may mean you don't get the exact price.

the stop

Next thing you do is set the stop. This is super important! At this point, if the price were to spike up $30 we'd be down ( 6 x $30 = ) $180 , and considering we only have $200 in this scenario, that would likely be the end of our glorious trading career.

This is a 'stop limit' order, which will place a buy of 'Price' when the price hits 'Trigger Price' .

'stop-market' are the same thing, but binance will close your short at the best price it can get. 

(TLDR: stop-limits guarantee a price, but not that you'll filll. stop-market guarantees a fill, but not the price. Choose your poison)

IMPORTANT: 'reduce-only' is what you want, almost always. I'll come back to that before the end of the post.

the target

This is less important, in some ways. As I've been writing this, the price has dipped to 70.20, and suddenly I'm thinking I might have got incredibly lucky and the price could dip quite hard. Just as with the stop, If the price dips $30, I could make  $180 here, and I'm only risking $3!

You have to make your own call here, I'm sticking to my rules and putting in my closing price (again, reduce-only):

now we wait

Now, walk away from it. We know how much we'll make if we were right, and how much we'll lose if we were wrong.

In many ways, I find this sort of trade less risky than plain HODLing, because I've defined exactly how it will work out.

reduce-only orders

Without a reduce-only order, there's a potential problem. Say this happens:

• price gets to our target . Yay! We made six bucks!
• price goes up to our stop. We bought another six LTC at 71.3 . errr...
• price tanks to $60 . we are now at a loss of ( (71.3 - 60) * 6 = ) $67.8 . NOOOOOOO

and there's a similar problem in the other direction - if stop hits, then target, we're in the same mess if the prices goes up.

A 'reduce-only' order will only work to reduce our position. So if the stop and target are reduce-only, it looks like this

• price gets to our target. Yay.
• since we no longer have a position, the reduce-only orders are auto-cancelled.

and again, it works the same in reverse if the stop hits first.

The only trouble with reduce-only orders is that you can't place them if you're not already in a position.

for that reason my process is usually to use a market order to enter - that way i can set reduce-only on the stops and targets.

UPDATE: 

Took this trade 2pm UTC 1st Februrary - turned out it was a great example of what I mean. Here's how it finished up.

1. was my entry - at the yellow line above. I place a market order and sold 6 LTC at $70.80. Immediately:

• I placed my reduce-only stop limit (buy 6 LTC if the price goes above 71.30) - the red line above
• I placed my reduce-only sell target (a limit buy for 6 LTC at 69.80) - the orange line above

2. the target hits here, I buy 6 LTC at the agreed price, and I make (70.80 - 69.80 = ) $1 for each.

• My futures balance gains $6.
• The 'reduce-only' stop is now no longer valid (because there's no position left to reduce!) so it's cancelled

If I hadn't used reduce-only, the stop limit order would still be in effect. So when the price went to that level (3. above), I'd open a buy order at that price, and I'd now be in an accidental long position. 

(the funny part is this would actually be working out right now, you'd be up another couple of dollars! But stops are there to reduce unpredictability, not increase it)

I hope that was useful. Feel free to ask questions if anything was unclear, and i'll try to amend it accordingly.