Revisiting Stop Losses After a Price Move

Revisiting Stop Losses After a Price Move

When you hold assets in the Spot market, a significant price drop can be concerning. Many traders use Futures contracts to manage this risk. This guide focuses on what to do *after* a price move has already happened, specifically how to adjust your existing spot holdings using simple futures strategies, like a Partial Hedge Strategy for Spot Assets. The main takeaway is that adjusting risk is an ongoing process; setting an initial stop loss is only the first step in Managing Position Size Relative to Account Equity.

Balancing Spot Holdings with Simple Futures Hedges

Holding cryptocurrency directly in your spot wallet means you feel the full impact of price changes. If you are worried about a short-term pullback but do not want to sell your long-term spot holdings, you can use futures contracts to create a temporary hedge. This is a core concept in First Steps Combining Spot and Derivative Positions.

The goal of hedging is not to make money on the hedge itself, but to protect the value of your spot assets during uncertainty.

When to Consider Adjusting Your Hedge

After a major price move—either up or down—your initial risk assessment might be outdated.

1. **After a Drop:** If the price dropped and you did not have a stop loss, or your stop loss was too far away, you might consider opening a small short futures position to lock in the current value somewhat. This is a form of protection, though you must be aware of Understanding Funding Rates in Futures Contracts. 2. **After a Surge:** If the price surged past your expected resistance, you might have missed an opportunity to sell some spot holdings into strength. You could now use a small short hedge to lock in some of those recent gains, or you might decide to remove an existing hedge entirely, depending on your Analyzing Market Structure Before Trading.

Partial Hedging Strategy

A partial hedge means you only protect a fraction of your spot position. For example, if you hold 10 BTC in your spot wallet, you might open a short futures contract representing 3 BTC.

• If the price drops 10%, your 10 BTC spot holding loses value, but your 3 BTC short position gains value, offsetting some of the loss.
• If the price rises 10%, your spot holding gains, but your short position loses, meaning you capture less of the upside than if you were completely unhedged.

This method reduces volatility variance but does not eliminate risk entirely. Always review the concept of Simple Hedging Example with Equal Spot and Futures to understand the mechanics fully. When you decide to close the hedge, remember the steps outlined in When to Scale Out of a Hedged Position.

Using Indicators to Guide Adjustments

Technical indicators can help you decide *when* to adjust your stop losses or hedge ratios. Remember that indicators are tools for context, not crystal balls. They are most useful when used together for confluence, as discussed in Combining RSI and MACD Signals Safely.

Relative Strength Index (RSI)

The RSI measures the speed and change of price movements.

• **Overbought/Oversold:** Readings above 70 suggest an asset might be overbought, potentially signaling a short-term pullback where tightening your stop loss or increasing a short hedge might be prudent. Readings below 30 suggest oversold conditions.
• **Context is Key:** A strong uptrend can see the RSI stay high for a long time. Do not automatically short just because RSI hits 75; check the overall Analyzing Market Structure Before Trading. For entry timing guidance, see Interpreting RSI for Entry Timing.

Moving Average Convergence Divergence (MACD)

The MACD helps identify momentum shifts.

• **Crossovers:** A bearish crossover (MACD line crossing below the signal line) after a strong run might suggest momentum is fading, making it a good time to review your downside protection. Reviewing Using MACD Crossovers for Trend Confirmation is essential here.
• **Divergence:** If the price makes a new high but the MACD makes a lower high (a bearish divergence), this is a strong warning sign that the upward move lacks conviction. This could prompt you to tighten stop losses or increase hedging. Look into Divergence Signals in MACD for more detail.

Bollinger Bands

Bollinger Bands show volatility. The bands widen when volatility increases and contract when volatility decreases.

• **Exhaustion:** If the price makes a significant move outside the upper band and then quickly retreats inside, this can indicate an exhausted move. This might be a signal to adjust your position or hedge.
• **Squeeze:** A very tight band formation (a squeeze) often precedes a large move. If you are already in a position, you might want to set wider stop losses to avoid being stopped out by the initial volatility burst, as detailed in Bollinger Band Squeeze Meaning for Volatility.

When using indicators, always be aware of potential Price Discrepancies between different exchanges, which can affect your trigger points.

Psychological Pitfalls After Price Action

Price moves often trigger strong emotional responses, leading to poor decisions, especially when revisiting risk management.

• **Fear of Missing Out (FOMO):** If the price moved up significantly and you missed it, you might be tempted to remove a protective hedge too early or chase the price higher without proper risk parameters.
• **Revenge Trading:** If a price drop triggered your stop loss (or forced you to adjust a hedge against your wishes), the desire to immediately enter a new, larger trade to "make back" the loss is Revenge Trading Pitfalls and Prevention. This often leads to overleveraging.
• **Overleverage Risk:** When using Futures contracts, high leverage magnifies both gains and losses. If you are adjusting a hedge, ensure your total exposure (spot plus futures) aligns with your risk tolerance. Always review Understanding Leverage Safety Caps for New Users.

Remember to set your stop-loss logic before entering any trade, and review the guidance on Dynamic stop losses for methods that adjust automatically. For more permanent protection, review Using Stop-Loss Orders Effectively in Futures.

Practical Examples of Risk Adjustment

Adjusting risk involves calculating potential outcomes based on your current spot holdings and futures position. Let's look at sizing a partial hedge.

Assume you hold 100 units of Asset X in your Spot market. The current price is $100. You are worried about a drop below $90. You decide to hedge 50% (50 units) using a short Futures contract.

We use a simple table to compare scenarios for the 50 units being hedged versus the 50 units that remain unhedged.

Scenario	Spot Value (50 Units)	Futures P/L (50 Unit Short)	Total Net Change
Price drops to $90 (10% loss)	-$500	+$500 (assuming no funding/fees)	$0
Price rises to $110 (10% gain)	+$500	-$500 (assuming no funding/fees)	$0
Price stays at $100	$0	$0	$0

This example shows that for the hedged portion, the immediate price movement (up or down 10%) results in a net change of zero for those 50 units. The remaining 50 unhedged units would gain or lose $500, respectively. This demonstrates how partial hedging stabilizes the value of the portion covered.

Before executing trades, always check the order book to understand Understanding Market Depth Before Executing. Finally, ensure your spot assets are secure by following Spot Wallet Security Best Practices. Regularly reviewing past trades using Reviewing Past Trades for Improvement helps refine future stop-loss and hedging adjustments.

See also (on this site)

• Spot Holdings Balancing with Futures Hedging
• Partial Hedge Strategy for Spot Assets
• Setting Initial Risk Limits in Futures Trading
• Understanding Leverage Safety Caps for New Users
• First Steps Combining Spot and Derivative Positions
• Managing Position Size Relative to Account Equity
• When to Scale Out of a Hedged Position
• Interpreting RSI for Entry Timing
• Using MACD Crossovers for Trend Confirmation
• Bollinger Bands Volatility Interpretation Basics
• Combining RSI and MACD Signals Safely
• Avoiding False Signals from Technical Indicators

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