How to choose between Trailing Stop-Loss and Regular Stop-Loss
It has never been easier to not worry about liquidation
Liquidations in DeFi have been becoming more and more rare.
Of course, with tools like Summer.fi best-in-class automations like Stop Loss, there is no excuse to get rekt that way.
As a brief recap, Summer.fi Automations are a game changer for the management of your Borrow and Multiply positions in DeFi for a couple of key reasons:
For a deeper dive into everything you need to know about Summer.fi Automations, you can read this post, but for now, let's talk about the best automations that protect you from liquidation.
Stop-Loss and Trailing Stop-Loss, what is the difference?
At Summer.fi, we offer 3 ways to Protect you from downward price action in the market.
- Stop-Loss: Automatically closing your position to collateral or debt.
- Trailing Stop-Loss: This method automatically closes your position to collateral or debt and moves your stop price up as the price of collateral rises.
- Auto-Sell: Automatically selling collateral to reduce your liquidation price and increase your LTV.
Today, we want to focus on the two most effective ways to protect your position against losses and liquidation, Stop-Loss and Trailing Stop-Loss.
Before we explain how you can start to decide between the two, let's first examine their differences.
Simply, the only difference between Stop-Loss and Trailing Stop-Loss is that a stop-loss order remains at a set price, whereas a trailing stop-loss moves with the market price to potentially lock in profits while still protecting against losses.
How to decide which is right for you and your position
When it comes time, decide which protection to use for your position, which we always recommend. Here’s a simple framework to help you decide:
Market Volatility:
- Stop-Loss: Better suited for less volatile markets where price fluctuations are minimal. This helps avoid selling prematurely due to normal price movements.
- Trailing Stop-Loss: Ideal for more volatile markets as it allows traders to continue benefiting from price increases while protecting gains from sudden downturns.
Risk Tolerance and Trading Strategy:
- Stop-Loss: Suitable for traders with a clear exit strategy based on specific price points. If preserving capital is more important than chasing potential upside, a stop loss can be more appropriate.
- Trailing Stop-Loss: This strategy is useful for those who want to let their profits run but also automate risk management to cut losses if the trend reverses.
Profit Goals:
- Stop-Loss: This is useful when the trader has a target entry and exit price in mind and prefers a straightforward approach to cap potential losses at a fixed amount.
- Trailing Stop-Loss: Beneficial for traders aiming to maximize potential upside without a predefined exit price, letting the market dictate the exit based on the movement.
Time Commitment and Attention:
- Stop-Loss: Less maintenance is required; once set, the stop level doesn’t need adjustment unless the trader decides to move it.
- Trailing Stop-Loss: Although it auto-adjusts, the initial setting and choice of trailing amount require careful consideration to balance. Less maintenance is capturing gains and avoiding market "noise".
Why not both?
While this post frames the decision as either Stop-Loss or Trailing Stop-Loss users of Summer.fi don’t always need to pick.
So you can start with Stop Loss and switch to Trailing Stop Loss as your market view and position change.
Getting in touch
If you have any questions regarding Summer.fi, contact us at support@summer.fi or our social media.