What are Stop-Loss Orders?

Beginner
March 29, 2023
Read time:
4m

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.

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.

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.


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.
  • They are simple to apply in investing practices and eliminate the necessity to monitor the market daily.

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.
  • 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.

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.

Complete quiz
What are Stop-Loss Orders?
Share this article
Explore other articles
Beginner

The Fear and Greed Index

Fear and greed are indicators of investor sentiment in the cryptocurrency market. Investors can better understand market behavior and make more informed investment decisions by monitoring the current index rate.
Advanced

What is MACD and how to use it to determine market trends and reversals?

The Moving Average Convergence/Divergence (MACD) is a trading indicator that measures an asset's momentum through two exponential moving averages (EMAs) of different periods.
Intermediate

What is token burning and why is it important?

Token burning can be beneficial for long-term investors but may negatively impact traders in the short term by reducing liquidity and causing price fluctuations.