Stop-Loss Order
What Is a Stop-Loss Order?
A stop-loss order is a type of order placed with a broker to buy or sell an asset when it reaches a certain price, designed to limit an investor's loss on a position. The idea is to prevent further losses if the market moves unfavorably. It acts as a safety net for traders by automatically triggering a sale or purchase when the price of an asset hits the stop-loss level.
How It Works
- Setting the Stop-Loss: You set a specific price for the asset. If the price falls to that level, the stop-loss order automatically triggers a sale to prevent further losses.
- Triggered by Price Movement: The stop-loss is usually set below the price you bought an asset for if you're holding it long (buying to hold) or above the price you sold it for if you're holding a short position (selling with the intention of buying back).
- Market or Limit: Once triggered, the stop-loss can become a market order (immediate sale at the best available price) or a limit order (sale only if the asset reaches a specified price).
Example
Let's say you buy Bitcoin at $30,000, and you want to limit your loss to 10%. You set a stop-loss order at $27,000. If the price of Bitcoin falls to $27,000, your stop-loss order will trigger and sell your Bitcoin automatically, minimizing your loss. This prevents you from losing more if the price continues to fall further.
Why Use a Stop-Loss Order:
- Risk Management: It’s a way to protect your capital by automatically selling if the price moves against you.
- Peace of Mind: You don’t need to constantly monitor the market since the stop-loss will take action for you.
- Prevents Emotional Decisions: Traders can avoid panicking or making decisions based on emotions, ensuring they stick to their risk management strategy.
The Sum Up
In short, a stop-loss order is your safety net to limit losses when the market moves in the wrong direction.
You can also look at one cancels the other, and trailing stop orders to see how you can use automatic orders to take advantage of a potential profit.