WHAT IS A FLASH CRASH
According to Wikipedia a "A flash crash is a very rapid, deep, and volatile fall in security prices occurring within an extremely short time period." Flash crashes can literally defy reason. When one considers the electronic nature of crypto exchanges and the trading software algorithms (bots) used to trade, it makes sense. Once the trading software catches onto a sharp drop in prices, it takes over and sells out.
One such flash crash occurred on GDAX with ETH on June 21, 2017. A huge 30mil sell order hit the books and drove prices sharply down, triggering trading software to sell and margin positions to liquidae. During the crash, which lasted a fraction of a second., the price of ETH fell from $317 to $.10, a crash of 99.9%. Millions of dollars were lost, in many cases because traders had taken the precaution of a risk management stop limit order.
WHY STOP LIMIT
Risk management is important. Among all the skills an investor needs to acquire this one is central. If you properly manage risk, you can lose and trade another day. Stop limit orders are one of the central instruments in managing risk. Before the price can drop too severely, stop limit order kicks in and sells at a certain price point. This allows you to exit a losing trade and gain better reentry.
STOP LIMIT RISKS
Stop limits however come with their own risks. A small dip can trigger a stop limit and cause one to lose their position before a breakout. This situation is heightened when trading with margins where a small drop in price can cause total liquidation of an account.
MARGIN TRADING RISKS
Margin trading on leverage is crypto trading on steroids. With up to 100x leverage, a small profit can become a huge one. Consequently when a margin trade fails the losses are huge, wiping out an entire account. During this type of trade, there is no room for error. If price falls below a certain level, liquidation of the trade occurs and all is loss. Recently Bitcoin has been traded with huge margins and the consequences were either huge gains or huge losses. As you can see on this BTC minute chart, there are a number of small, sharp dips which recover in minutes. These are catastrophic for margin trades as a small $100 dip in price can liquidate the trade and their account. Watch for these dips when setting any kind of stop limit or margin order.
This is not financial advise. I'm not an adviser. This article is for informative purposes only.
Get a free stock on ROBINHOOD: https://share.robinhood.com/benc461