A trader, opening a Long or a Short Position, aims to benefit from the price movements of the underlying asset. The price may move far in the adverse direction while the position is open when a trader is not around to close it and fix the loss. To prevent uncontrollable losses, there is a tool called Stop Loss. In this article, let’s look closely at what Stop Loss is and how it works.
Note: Here you can check a more detailed article on how to benefit when the price moves up and when the price moves down.
A Stop Loss is a type of order placed on a position and designed to limit a trader’s loss. If a price moves in an adverse direction and reaches a predetermined level, Stop Loss activates and closes the position to fix the amount of loss.
Let’s look at specific examples:
Stop Loss on a Short/Sell position
You can use a Stop Loss order as a protection for your Short Position in case the market price goes up. Remember, that Stop Loss price should be entered above the current market price.
Let's say you open a position to sell 0.1 BTC at €6,500. However, as you may know, the market is volatile, so you want to limit your possible losses in case the price goes up.
For example, you wish to set Stop Loss price at €6,600. If the market price grows to €6,600, your position will be closed, preventing further losses.
In this case, Stop Loss on your short position will be triggered when Ask price reaches the price you have specified. Why Ask? Because your Stop Loss essentially closes the Short Position.
Stop Loss on a Long/Buy position
You can use a Stop Loss order as a protection for your Long Position in case the market price goes down. Remember, that the Stop Loss price should be entered below the current market price.
Let's say you open a position to buy 0.1 BTC at €6,500. As the market is volatile, you want to limit your possible losses in case the price goes down.
So you set Stop Loss price at €6,400. If the market price drops to €6,400, your position will be closed, preventing further losses.
In this case, Stop Loss on your buy position will be triggered when Bid price declines to the level you have specified. You look at Bid price (and not Ask) because Stop Loss closes your Long Position.
Stop Loss often used together with Take Profit and both represent basic risk management practices a trader should implement.
Stop Loss order is an order which you can set up on every position using CEX.IO Broker. When the set price is reached, this order executes (Buy/Sell) as a Market Order for your position at the closest available price on the market.
On CEX.IO BROKER, you can set the stop price in the order window by ticking the box for Protection Orders in the Trading Terminal and specifying the Stop Loss price of your choice.
Notice that Stop Loss order is a market order. It means that the price you set when you place a Stop Loss and the price at which the position actually closes may be different. The reason for this is that the markets can be highly volatile and prices may change quickly.