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Explained for beginners: Stop Loss
Source: | Author:finance-102 | Date2023-03-21 | 169 Views | Share:
Stop loss is a risk management tool used by investors and traders to limit their potential losses in a trade or investment. It is an order placed with a broker or trading platform to automatically sell or buy a security if it reaches a certain price point. The stop loss order is triggered if the security's price falls below or rises above a specified level, which is known as the stop loss price.

Stop loss is a risk management tool used by investors and traders to limit their potential losses in a trade or investment. It is an order placed with a broker or trading platform to automatically sell or buy a security if it reaches a certain price point. The stop loss order is triggered if the security's price falls below or rises above a specified level, which is known as the stop loss price.


There are several types of stop loss orders that traders can use to manage their risk:


  • Market Stop Loss Order: A market stop loss order is an order to sell a security at the next available market price once the stop loss price is triggered. This type of stop loss order guarantees that the trade will be executed, but it does not guarantee the price at which the trade will be executed.

  • Limit Stop Loss Order: A limit stop loss order is an order to sell a security at a specified price or better once the stop loss price is triggered. This type of stop loss order guarantees the price at which the trade will be executed, but it does not guarantee that the trade will be executed.

  • Trailing Stop Loss Order: A trailing stop loss order is an order that automatically adjusts the stop loss price as the price of the security moves in the trader's favor. This type of stop loss order allows traders to protect their profits while still giving the security room to move in their favor.

  • Guaranteed Stop Loss Order: A guaranteed stop loss order is an order that guarantees the execution of the trade at the stop loss price, even if the market gaps or the security's price moves rapidly. This type of stop loss order provides the highest level of protection but may come with additional fees.


Using a stop loss order can provide several advantages for traders and investors:


  • Risk Management: Stop loss orders can help traders manage their risk by limiting potential losses. They provide a way for traders to set a maximum loss that they are willing to tolerate on a trade.

  • Emotion Control: Stop loss orders can help traders control their emotions and prevent them from making impulsive decisions based on fear or greed. By setting a predetermined stop loss level, traders can avoid making emotional decisions in the heat of the moment.

  • Trade Execution: Stop loss orders can ensure that trades are executed automatically, even if the trader is not actively monitoring the market. This can be particularly useful for traders who cannot constantly monitor their trades.

  • Flexibility: Stop loss orders are flexible and can be adjusted as market conditions change. Traders can adjust their stop loss levels as the market moves in their favor, allowing them to lock in profits and manage their risk effectively.


Overall, using stop loss orders can help traders and investors manage their risk, control their emotions, and execute trades more effectively. They are an essential tool for any trader or investor who wants to manage their risk effectively and protect their capital.


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