A stop-loss order is a risk management tool that automatically sells a security when its price drops to a specified level. This helps limit potential losses and protects your investment from significant downturns.
Risk Management:
A stop-loss order is primarily used to manage risk by defining a specific exit point for a trade. It allows you to cap potential losses without needing to actively monitor the market.
Automatic Execution:
When the stop price is reached, the stop-loss order is activated and converted into a market order. The asset is then sold at the best available price, which may differ from the stop price due to market volatility.
Flexibility:
Stop-loss orders can be placed at any price level, giving you the flexibility to customise your risk management strategy based on your risk appetite and market perspective.
For Long (Buy) Positions:
When holding a long position, a stop-loss order is set below the current market price. If the asset's price drops to the designated stop level, the order is triggered and becomes a market order, selling the security at the next available price. This helps limit potential losses by exiting the position early.
For Short (Sell) Positions:
For short positions, a stop-loss order is placed above the current market price. If the price rises to the specified stop level, the order is triggered and converts into a market order, buying back the security at the next available price to help minimise losses.
Imagine you hold 100 shares of a company currently trading at USD 100 per share. To manage your risk, you place a stop-loss order at USD 90.
If the stock price falls to USD 90, the stop-loss order is triggered and converts into a market order. Your shares are then sold at the next available price — for example, USD 89.50 — due to market fluctuations.
Although the execution price is slightly below your stop level, the order helps limit your losses and protects your investment from a steeper decline.
Advantages
Disadvantages
1) Click on the 'Buy' or 'Bid' option, within your desired instrument. This will open a trade ticket.
2) From the trade ticket, you can choose the trade type (buy or sell) and enter the amount you wish to trade.
3) After you have entered the desired trade type and amount, click 'Add take profit/ stop loss'
4) Choose the stop loss/profit amount, confirm your order details, and press 'Place order'.
Further, click on 'Take profit' or 'Stop loss' to choose your Type and Unit.