Stop-Loss and Trailing Stop Loss

Reduce potential losses

A risk management tool

Selling at the top is often a trader’s primary concern besides buying at the bottom. But what if the trade doesn’t go as planned? A stop-loss order helps mitigate further damage by exiting a position at a pre-defined level. In the event that an asset’s price moves against your position, your set stop-loss will trigger automatically, and close out the position before the price moves further. 

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Stop-loss in action

Imagine you buy Bitcoin at $50,000 and are willing to risk a 10% loss, so you set a stop-loss at $45,000. In the event that Bitcoin slides to $45,000, your position will exit automatically, and you’ll be spared additional losses if price continues to fall. This also saves you the trouble of keeping watch and inputting a manual order. 

A word of caution though, setting stop-losses can be tricky because markets fluctuate, even when trending in a solid direction. Setting a very tight stop-loss, say 0.1%, is a minimal risk but is almost certain to trigger. So while your assets will have been ‘protected’ you may also miss out on profits. Some breathing room is required.

Trailing stop-loss?

Similar to a stop-loss, a position will be exited if price reaches a specific level. The difference though is that this price level isn’t fixed. The stop price adjusts if the market moves in your favored direction. The stop price will stay in place when the market moves against you. 

Let’s say If you purchased Bitcoin at $50,000 but with a trailing stop loss of $5,000 Your stop-price in this case is $45,000, and is where your position would close if the price of Bitcoin immediately reversed. However, if Bitcoin rose to $58,000 your new stop-loss will be $53,000. This helps protect from losses with the added potential to lock in profitable positions.