[CoryG89]

I assume this is getting downvoted because it won't actually work. Can someone explain why? Can you not use a stop loss like this in futures trading when you short something?

May be a silly question, but I know little about this stuff.

[travmatt]

I’m no investor, but one reason I could think as to why it wouldn’t work is once a crash starts, demand would suddenly dry up at the prices you specified and you’d suddenly find yourself with a bunch of orders that can’t be filled.

[nostrademons]

Yeah. Or worse, you have orders that are filled, but because they are market orders and the market has disappeared, they aren't filled at anywhere close to the price you expected.

At my first job I had a project that involved looking at the actual order book for various stocks on the NASDAQ. There's always some asshole who puts in a limit buy for $0.01 on the hopes that if liquidity dries up, they'll be the best bid and get the stock for literal pennies on the dollar (I've been that asshole, though I've never actually had an order filled at that price). Normally all these orders are completely irrelevant because they're nowhere close to being the best bid, so other buyers get the stock and they just sit there on the order book.

In a flash crash scenario where everybody runs to the exits at once, it's possible for liquidity to completely dry up. The market gets hammered by so many sell orders that they burn through all the people willing to buy at reasonable prices. Then the exchanges dutifully match you up with whoever's left in the order book...which is usually the jokers who are like "Well, I'll put in a limit order for $0.01, leave it there, and see if it ever fills." Because your stop is actually a market order, you take whatever price the market gives you, which is...$0.01. You've just sold your $18K bitcoin for one cent.

This actually happened with the flash crash of 2010, but because market manipulation was proven, NASDAQ halted trading and invalidated the trades that occurred at those prices. There are no such failsafes or means of recovery with Bitcoin.

https://en.wikipedia.org/wiki/2010_Flash_Crash

Stop limits have the problem you mentioned - they just won't get filled in a flash crash, leaving you with Bitcoin that you can't get rid of.

[cvsh]

>There's always some asshole who puts in a limit buy for $0.01 on the hopes that if liquidity dries up, they'll be the best bid and get the stock for literal pennies on the dollar ... Because your stop is actually a market order, you take whatever price the market gives you, which is...$0.01.

Why doesn't everyone do this constantly if it's a possibility? Low chance of such a windfall, but what's the downside?

[nostrademons]

Basically extremely low chance of windfall, plus transaction costs. Most brokers charge you to place an order; even if the price is just a few pennies, if your chance of that order actually being filled is one in an extremely low number, you're still losing money on the deal. Additionally, "good till canceled" orders (which is what you want to use here) are time-limited on most exchanges, typically to 30 days. That means you need to spend mental bandwidth refreshing them every month, which for something that has an infinitesimal chance of paying out, usually isn't worth it. (I basically let my order lapse after a month because I forgot about it.) The orders exist because out of millions of market participants, somebody's going to place one, but it generally isn't cost-effective for that person to be you.

With regulated exchanges like the major stock ones, you also have to worry about your transactions being invalidated, eg. in the 2010 flash crash nobody who did this actually got paid out because the exchange said "Oops, software glitch" and canceled all transactions before settlement (with the stock market, you don't actually receive the stock until 3 days after you make the transaction).

[SilasX]

In addition to the sibling comment, there's a non-trivial risk that, when the crash happens, it's because of a legitimate, non-local drop in value, and you're stuck holding something worthless.

[withdavidli]

This is exactly what happened with ETH few months back on GDAX. 300 to 200, crashes the site in seconds, triggered pretty much all stop losses and margin calls. When down to a penny.

[dragonwriter]

A stop loss will (assuming anyone is willing to take the other side at any price, since it's a market order) get filled once triggered, but depending on market dynamics with potentially unlimited slippage. Slippage tends to be limited in markets with high liquidity, but as I understand Bitcoin on any existing exchange hasn't consistently shown that behavior.

A stop limit order doesn't have unlimited slippage, but may not get filled at all; there is no foolproof stop order.

[Anderkent]

No guarantee what price your stop order will execute at; it's still unbounded risk.