Stop-Loss Order is a trading order that automatically closes a position when the price of an asset reaches a predetermined level set by the trader. This limits investors' losses and is notably advantageous when traders cannot monitor the market in real-time.

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How does it work in the crypto market?

The stop-loss order in the cryptocurrency market operates similarly to other markets. Once an appropriate stop-loss order is set, the trading platform immediately closes a position when the price of the selected cryptocurrency reaches this fixed level.
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<sub>Let's suppose a trader has $5,000 worth of cryptocurrency "A" and decides to set a stop-loss order at $4,500. Unfortunately, his asset's value kept decreasing during the following weeks and dropped below $4,500.

This triggers the set stop-loss, closing the position at $4,498.</sub>

Advantages of Stop-Loss Orders

• Stop-Losses allow traders to limit their losses to a level they are willing to accept, protecting their investments against potential, significant loss.
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• They are simple to apply in investing practices and eliminate the necessity to monitor the market daily.

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Disadvantages of Stop-Loss Orders

• Short-term price fluctuations could trigger the stop-loss, which results in a premature sale. In extreme cases, market volatility can even cause stop-loss orders to be executed at prices far below the intended level, leading to even higher losses.
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• They may be ineffective in protecting against price gaps, as they are typically executed at the next available price once a certain threshold is reached. If there is a significant price gap between mentioned prices – the stop-loss order may be completed at a much lower or higher point than intended.

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Summary

A stop-loss order is an effective way for investors to limit their losses when the price of an asset drops to a certain level. However, it is essential to remember that prices in the cryptocurrency market can change quickly, potentially leading to a difference between the set stop-loss price and the actual closing price.