Guys, stop using stop orders

[Kloug]

Do people really have to lose money to understand what a (market) stop order is?

What I see on Bitfinex & GDAX is frightening. Some really have sold their NEO at $4 (& thus some lucky ones have bought). Some have sold their OMG at $3.
Did they mean to? Of course not. It has happened in the past, and poor users cried & threatened to sue exchanges.

Market stop orders shouldn't be used, and they shouldn't even exist for crypto or anything this volatile.
What we saw yesterday was the result of a cascade of stop loss orders, nothing else. There was hardly a manual panic, it was automated panic.

At first I thought that Bitstamp had crashed, but then I realized that maybe it had been closed on purpose for a short time, to avoid this (especially considering Bitstamp had been pointed for such problems with stop orders in the past).

These are automated, they probably get a higher priority, happen very fast, hog servers, not even leaving buyers a chance to buy.
Perhaps all exchange need a protection for this, really freezing on purpose when this kind of crap occurs. There is a big difference between a panic sale that comes from humans, and the one from a cascade of stop orders.

So stop using stupid market stop orders. Use a limit stop order if your exchange offers one, or just don't.
Pretty sure that all exchanges will now start to turn their market stop order into limit ones, after this event, or the next ones. It's not even a bug, it's offering the wrong tool for the market.

Or... keep placing stop orders.. and give your money to some lucky guys who will make 300% in a few seconds.

[1714848510]

1714848510

[cryptician12]

One other thing is that exchanges see where most stop orders are accumulated. Possession of this kind of info is extremely powerful and should not be underestimated. Seriously! You don't need a lot of funds to actually trigger an avalanche of stop orders and then buy cheap at the very bottom. And who knows what exchanges do with this info... maybe they use it internally, or sell it to the highest bidder.

[Kloug]

Indeed..

That's why shorting should be illegal.

That said, when it's an avalanche on all exchanges it seems legit enough. An avalanche on one single exchange would look more suspect.

& who even knows if this wasn't a test for the "Bitcoin futures" guys (or alike) to know how predictably they can bank on dips..

[TheQuin]

The problem with using a stop limit order is that market is likely to run straight through it without getting filled. As a professional trader, I can assure you that always having a stop market order in place to protect your account is one of the very first things you are taught. The problem you are observing is simply that many traders make the mistake of placing their stop in the obvious place. It's not as above suggested that the exchange can see them it is just that experienced traders know exactly where inexperienced traders will put them. Running stops has been part of trading since it began and it will always be.

[dothebeats]

One other thing is that exchanges see where most stop orders are accumulated. Possession of this kind of info is extremely powerful and should not be underestimated. Seriously! You don't need a lot of funds to actually trigger an avalanche of stop orders and then buy cheap at the very bottom. And who knows what exchanges do with this info... maybe they use it internally, or sell it to the highest bidder.

Wouldn't that be fraud in some way and the exchange operators can be sued? That would be a serious breach in security for all the users that entrusted them with money and should be given the right lawsuit. We never know what happens behind the scenes on a trading platform. All we know is that they have all the information we relay to them that can possibly screw is if they used it for other purposes other than identification, proof of transactions and what not.

Personally if I'm not around or I think I wouldn't be able to keep up with the trading action, I don't place any sell orders but usually buy orders. Stop-loss? I use it only if I have to do something real quick and be right back immediately afterwards. It also occurred to me that exchanges also manipulate the prices, up to a certain point where they can touch stop-loss in order to make quick profits. It would be fraud, but what do we know right?

[japaninja]

While I see the OP's point, i believe it is too much of a generalization not applicable to all cases. Stop order is a very important feature and trading and has saved me a couple of times already. The thing is you really need to learn how to use and know when and at what price to place stop orders. Generally if you are a newbie doing guesswork with trading, stay away from stop orders.

[Kloug]

The problem with using a stop limit order is that market is likely to run straight through it without getting filled.

Yeah, but that's exactly the point.

When you place a stop order at 1000, do you agree to sell at 10? Of course not! No one does. But the exchange can end up selling at 10 and you are screwed.
Stop orders should not exist, they should always be stop limit, and then you are responsible for the limit. If you want a normal stop, then you simply put your limit at zero, which, admit it, you would NEVER do.

If a huge BTC megacrash was causing my BTC to sell at 100, I would be pretty pissed. There is no way the BTC would instantly drop to 100, without EVERYONE buying.

[Kloug]

While I see the OP's point, i believe it is too much of a generalization not applicable to all cases. Stop order is a very important feature and trading and has saved me a couple of times already. The thing is you really need to learn how to use and know when and at what price to place stop orders. Generally if you are a newbie doing guesswork with trading, stay away from stop orders.

No, no way. Tell me just *1* advantage of a stop order over a stop limit. You'd just set your limit to zero, and a stop limit would become a classic stop (yeah sure, limit orders are normally scheduled after market, but at zero it would just mean market. The thing is that if there are that many market orders in a chain reaction, the last thing you want is to be the last of them and still be forced to sell).
But please don't tell me you would ever set your limit to zero, you would not. You would probably set it to 50%, 30% at worst. You well know that nothing drops 70% instantly without recovering at least a little, seconds later. And 70%, anyway, isn't a "stop loss", it's just a loss.

[treather]

While I see the OP's point, i believe it is too much of a generalization not applicable to all cases. Stop order is a very important feature and trading and has saved me a couple of times already. The thing is you really need to learn how to use and know when and at what price to place stop orders. Generally if you are a newbie doing guesswork with trading, stay away from stop orders.

This. Its there for a purpose, and many traders can attest to its effectiveness. I will never leave a position open without setting a stop order, especially when I cannot monitor price movements.

[TheQuin]

The problem with using a stop limit order is that market is likely to run straight through it without getting filled.

Yeah, but that's exactly the point.

I'm not sure you got my point though. If the market runs straight through your sell stop limit order and it doesn't get filled then you are still short and the market can still be falling fast while you are trying to manually exit. In that scenario, you will lose a lot more than the slippage on a stop market order.

If you really are that concerned about slippage then there are steps you can take to reduce it.

1) Stay away from illiquid markets and only trade coins with high volume on the biggest exchanges.

2) Learn where is safe to put your stops.

or otherwise

3) Don't trade.

[cryptician12]

One other thing is that exchanges see where most stop orders are accumulated. Possession of this kind of info is extremely powerful and should not be underestimated. Seriously! You don't need a lot of funds to actually trigger an avalanche of stop orders and then buy cheap at the very bottom. And who knows what exchanges do with this info... maybe they use it internally, or sell it to the highest bidder.

Wouldn't that be fraud in some way and the exchange operators can be sued? That would be a serious breach in security for all the users that entrusted them with money and should be given the right lawsuit. We never know what happens behind the scenes on a trading platform. All we know is that they have all the information we relay to them that can possibly screw is if they used it for other purposes other than identification, proof of transactions and what not.

Personally if I'm not around or I think I wouldn't be able to keep up with the trading action, I don't place any sell orders but usually buy orders. Stop-loss? I use it only if I have to do something real quick and be right back immediately afterwards. It also occurred to me that exchanges also manipulate the prices, up to a certain point where they can touch stop-loss in order to make quick profits. It would be fraud, but what do we know right?

Sure, but not all exchanges are regulated, which makes their "behind the scenes" that much more invisible and thus harder to sue and prove anything. As an example, just look at the Forex industry (which in my opinion isn't very well regulated at all). Lots of scam brokers out there, and I'm sure you'd find lots of stories with people whose lawsuits went absolutely nowhere. Now, I don't know for certain what crypto exchanges do and do not do, but I'm guessing that due to the lack of regulation, the temptation to utilize that sort of information is pretty big.  I also agree with TheQuin on the point that pro traders have a rough idea where the stops might be, and they place their trades accordingly. That's a big factor as well.

And just to clarify, I'm not completely against stops. I do use stops as well but only on more or less liquid markets. They are ok as long as you use them wisely and understand all the risk involved.

[TheQuin]

Sure, but not all exchanges are regulated, which makes their "behind the scenes" that much more invisible and thus harder to sue and prove anything. As an example, just look at the Forex industry (which in my opinion isn't very well regulated at all). Lots of scam brokers out there, and I'm sure you'd find lots of stories with people whose lawsuits went absolutely nowhere. Now, I don't know for certain what crypto exchanges do and do not do, but I'm guessing that due to the lack of regulation, the temptation to utilize that sort of information is pretty big.  I also agree with TheQuin on the point that pro traders have a rough idea where the stops might be, and they place their trades accordingly. That's a big factor as well.

And just to clarify, I'm not completely against stops. I do use stops as well but only on more or less liquid markets. They are ok as long as you use them wisely and understand all the risk involved.

I just wanted to point something out about your point on unregulated Forex brokers. The difference here is that a Forex broker might well be taking the other side of your trade rather than placing it with an interbank dealer and therefore stands to gain when you lose. An exchange should be an entirely different type of entity that is simply matching orders of its clients and has no financial interest in whether you make a profit or loss. I know with crypto being mainly unregulated there will always be doubts but it is a different level of corruption if they actively help some clients over others. What Forex brokers do is actually legal believe it or not.

[cryptician12]

I just wanted to point something out about your point on unregulated Forex brokers. The difference here is that a Forex broker might well be taking the other side of your trade rather than placing it with an interbank dealer and therefore stands to gain when you lose. An exchange should be an entirely different type of entity that is simply matching orders of its clients and has no financial interest in whether you make a profit or loss. I know with crypto being mainly unregulated there will always be doubts but it is a different level of corruption if they actively help some clients over others. What Forex brokers do is actually legal believe it or not.

Fair point, with forex brokers you might indeed just be playing against their books.

[Imfinnabeon]

I agree with your sentiment because when I was trading much more earlier this year I often noticed how my stop orders would barely get hit then rebound like mad and that kind of drove me mad . Needless to say maybe I should have been better in my approach but now I add the coins to the exchange when I am ready to trade and not a minute earlier. Learning about how exchanges have control over your coins and you are helpless helped me learn, good thing I didn't have to learn the hard way by losing a bunch of altcoins.

[anitaraymonds]

Do people really have to lose money to understand what a (market) stop order is?

What I see on Bitfinex & GDAX is frightening. Some really have sold their NEO at $4 (& thus some lucky ones have bought). Some have sold their OMG at $3.
Did they mean to? Of course not. It has happened in the past, and poor users cried & threatened to sue exchanges.

Market stop orders shouldn't be used, and they shouldn't even exist for crypto or anything this volatile.
What we saw yesterday was the result of a cascade of stop loss orders, nothing else. There was hardly a manual panic, it was automated panic.

At first I thought that Bitstamp had crashed, but then I realized that maybe it had been closed on purpose for a short time, to avoid this (especially considering Bitstamp had been pointed for such problems with stop orders in the past).

These are automated, they probably get a higher priority, happen very fast, hog servers, not even leaving buyers a chance to buy.
Perhaps all exchange need a protection for this, really freezing on purpose when this kind of crap occurs. There is a big difference between a panic sale that comes from humans, and the one from a cascade of stop orders.

So stop using stupid market stop orders. Use a limit stop order if your exchange offers one, or just don't.
Pretty sure that all exchanges will now start to turn their market stop order into limit ones, after this event, or the next ones. It's not even a bug, it's offering the wrong tool for the market.

Or... keep placing stop orders.. and give your money to some lucky guys who will make 300% in a few seconds.

To stop using stop loss is not a bad trading advice. But it is a very serious damage and advice that will send a trader with small portfolio capital home early. If your capital is huge that will carry you without stop loss , then it is good.

[Kloug]

I'm not sure you got my point though. If the market runs straight through your sell stop limit order and it doesn't get filled then you are still short and the market can still be falling fast while you are trying to manually exit. In that scenario, you will lose a lot more than the slippage on a stop market order.

Let me take, again, that example of that guy who sold his NEO at $4. But we could take the other example of that guy who got his ETH sold at 10 cents, if it makes it clearer:
https://www.reddit.com/r/ethtrader/comments/6iokzy/gdax_just_sold_a_good_chunk_of_my_ether_at_10/
https://www.cnbc.com/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html
That made the news some time ago, and people didn't learn from it.

What did that guy do wrong? HE USED A STOP ORDER. HE DID NOT DO ANYTHING ELSE WRONG.

Wouldn't YOU buy an ETH at 10 cents? Who wouldn't? Do you think that if you had asked the guy "hey dude, you put a stop order there, we're gonna sell your ETH at 10cents now, are you ok with that?" he would have replied YES? Yet, that is exactly the risk you take with a stop order, it shouldn't be there, you should be responsible for the amount of risk you wanna take.

People who place stop orders are idiots who believe that if they place it at 100, they are garanteed to sell at 100.
The only real stop order is a stop limit. If you wanna place a stop at 100, you will probably place your limit at 50, or whatever price you're still confortable selling at. But I SERIOUSLY doubt that you will place your limit at zero, or I don't understand what's wrong with you.
Everyone understands that if something falls from 100 down to 0.1 in a few seconds, it's not normal market behavior, it's just a large dump, or a cascade of stops. Then you'd rather keep your coin, hoping it will go up again, rather than simply losing it.
The guy who placed his stop order and saw all of his ETH sold at 0.1, pretty much lost everything, quite ironic for something called "stop loss", no?


Obviously professionnal traders will tell you that stop orders are useful, because they don't trade things THIS volatile for a living.

I really think all exchanges should at least implement stop+limit, and put limit by default to 50% of the stop price.

There are things that could be done, even though I can't imagine any exchange doing it. Like if an exchange gets into a cascade of stops, it enters a phase of "you can buy, but you can not sell for now", spreading the cascade over time.
For ex, the other day's dip would have been spread over like 10min. For 10min, all the stops would have been processed slowly. Any manual sell order would have been scheduled for after those 10min, but any buy order would have been processed immediately. It's quite sure that the dip wouldn't have been this large. Not only it would have dipped less, but it would have rised back faster because there would have been less fear. And things like the ETH or NEO case would simply have been avoided.
It'd be quite easy for an exchange to implement this "special mode" happening whenever a market falls over x% per second, or something.
That's also what whoever is not an idiot would do, if he had to sell a lot of shares. He would spread it over time, selling little amounts, letting the market go up again. Quite possible that the ETH case wasn't a cascade but just 1 stop on a way too large amount.

An alternate solution would be, whenever a cascade of losses is detected, to average all stop orders. That would be less useful, but it wouldn't produce random big losers.

[energycom]

I couldn't understand your problem accurately since I'm a beginner, but I faced problem many times with my stop orders. In bittrex, many times they didn't work in the cases which they were supposed to work actually.

I can't understand what's wrong with my trading orders.

[Kloug]

I couldn't understand your problem accurately since I'm a beginner

Let me explain in depth.
-when you place a limit sell, say at 100, that's the price you wanna sell at, and either it will sell at 100 (in one or more chunks), or won't sell at all.
-when you place a market sell, you sell your share to the highest price of whoever is ready to buy it (in one or more chunks).

You can understand that if you have like 1000 BTC to sell, and you place a market sell, some will be sold at 100, some at 90, some at 85, etc.. and if you have many and the order books are small, some will end up sold at 1 cent.

So that's where the problem of a stop loss is, the price of your stop loss is the price that will trigger a *market* order. You placed a stop loss at 100, it will then sell everything to whoever wanna buy it, at 100 or under.

That happens instantly, thus it only applies to the existing order book, it won't leave a chance to anyone to buy manually.
And when many people have stop orders, the falling prices resulting from market sells will produce a chain reaction. There will be a huge lot of sells that the order books aren't ready to cope with, and your share for which you placed a stop loss at 100, may end up being sold at 1 cent. And some lucky guy who had placed a limit buy at 1 cent, managed to exploit your stop order & made a huge margin in no time.


But the problem you had was probably due to the volatility. You see the market price at 130, you place your stop at 100 and you think you're ok, but the high volatility can make the market price fluctuate heavily between say 90 & 150, fast enough that you don't even see it. You then think that the exchange triggered your stop order by mistake, but it didn't, it just went under 100 & bounced back so quickly that you didn't see it happening.
Even a stop+limit wouldn't have helped here. To place a safe stop you have to watch the order book chart, to see if there is a hole around the mid price, to see if there are chances that the mid price is likely to go up & down very quickly.

[Maum]

Stop orders are not generally bad. Sometimes, coins are too early sold but often it protects traders agains big loss. I even look for a dynamic stop order.

[diouf67]

Indeed..

That's why shorting should be illegal.

That said, when it's an avalanche on all exchanges it seems legit enough. An avalanche on one single exchange would look more suspect.

& who even knows if this wasn't a test for the "Bitcoin futures" guys (or alike) to know how predictably they can bank on dips..

Why should shorting be illegal? It is the same as speculating on the price increasing. I actually think it was simply just a normal crash, yes of course there were some stop orders thrown in there but not enough to see the falls that we did, at least not in my opinion.