Stop-Loss Order
A stop-loss order lets traders dictate a specific price to buy or sell a cryptocurrency. These types of orders are primarily used as a way to limit a trader’s potential loss on a cryptocurrency. For example, if a trader were to set a stop-loss order at 20% below the price in which they originally bought, it would mean they are attempting to limit their losses to 20%. A stop-loss order is essentially an ‘If this happens, then do this’ order.
Stop-loss orders allow traders to manage their portfolios without needing to constantly monitor market movements, and they do not cost anything to implement; they can be thought of as a free insurance policy. Stop-loss orders also allow traders to be more calculated in their trading approach, rather than letting their emotions dictate when to sell or buy.
Note that a stop-loss order can activate in an environment where prices move extremely fast due to breaking news or a similar event, where the price of the cryptocurrency in the stop-loss order could have significant short-term fluctuation, potentially triggering a trader’s stop price. Additionally, in a low liquidity environment, it is possible that traders end up with a drastically worse final price than intended due to no orders on the other side of the order book.
Key Takeaway
A stop-loss order is an order that gets placed with a broker, which tells them to buy or sell a stock via a market order once it reaches a specific price.