A stop-loss order in trading allows investors to determine the lowest price at which they are willing to sell an asset and trigger an automatic sell order when and if this price is reached.
What is a stop-loss order?
A stop-loss order is one of the most useful tools investors have to limit the amount of losses on their investments. Both stocks and cryptocurrencies are volatile assets that change in price constantly. In order to limit the amount of loss traders can possibly go through, many exchanges and trading services offer stop-loss orders. The way a stop-loss order works is simple. Traders have the opportunity to set up a minimum price for the assets in their portfolio. Once this minimal price is reached, the exchange automatically triggers a sell order to limit the losses for the trader. Stop-loss orders are extremely helpful, especially when investing in cryptocurrencies that are traditionally more volatile. Traders usually set up stop-loss orders on prices higher than what they bought the crypto tokens for to still realize a gain, even if the value of the token is falling. Bearish periods like the one major tokens Bitcoin and Ethereum experienced towards the middle of 2021 call for an increased number of stop-loss orders. While the price of the two tokens was going up for a while, in May 2021, the trend reversed. One of the surefire ways to prevent a significant loss in such periods is through a stop-loss order. By placing a stop-loss order at a price point that still allows you to make a profit, investors eliminate the chance to lose significant amounts of money.
One of the main benefits of stop-loss orders is the fact that they give investors the opportunity to not monitor stocks or crypto tokens every second of the day. A stop-loss order gives the investor the security that an automatic sell order will be activated once a certain price has been reached. In this sense, traders set up stop-loss orders and don’t have to worry about monitoring their assets in case the price is going down. Not to mention that, a stop-loss order can help an investor still take out gains, as it can be placed on a price that is above the price an asset was purchased for.
Stop-loss orders are one of the most important tools which traders have to protect themselves against extreme volatility in the price of their assets. In cryptocurrency, a stop-loss order is capable of preventing losses on tokens which experience high fluctuations in price.