A Safety Measure for Stock Trading: Stop-Loss Order
In the dynamic world of trading, one tool that has become increasingly popular is the stop-loss order. This article aims to demystify this order type and provide a clear understanding of its purpose and functionality.
A stop-loss order is a combination of a stop price and a limit price. It serves as a market order with an additional step, allowing traders to establish new positions at price levels they believe the asset will be at in the future. The main purpose of a stop-loss order is to prevent traders from incurring losses.
In a fast-moving market, where executing trades at the right moment can be challenging, stop-loss orders prove to be particularly useful. They act as a form of insurance for traders, ensuring that losses never exceed a specified point. Stop-loss orders can be considered a delayed market order that becomes effective when the stop price becomes the current market price.
When a stop-loss order is triggered, it is unlikely to be executed at the exact stop price; instead, it will be executed at the next available market price. For example, if a stop-loss order is set to buy one Bitcoin at $59.9K when the current market price is $60K, the order would be executed at the market price of $59.85K. The deviation in price between the stop price and the execution price is usually minimal.
The trading terminal displays the stop price as the trigger price for the exchange to purchase the chosen amount of BTC at the prevailing market price. It is also possible to place a limit order with a stop price, ensuring that the trade is executed only at a specific price level.
However, it's important to note that stop-limit orders may not always be executed due to sharp price movements exceeding the specified limit price. Additionally, stop-loss orders will only fail to go through at a price similar to the stop price if they are triggered right before the market closes or there's too little liquidity.
Stop-loss orders are a valuable resource for traders, providing a level of security and control in the unpredictable market. While the author of the articles about stop-loss orders on trading.de remains unspecified, the information provided offers a comprehensive guide for understanding and implementing these orders in trading strategies.
