What Are the Pros and Cons of Stop-Loss orders in Trading?
Online trading is the new go-to form of investment these days. Online trading offers individuals complete control over decisions, reduced trading costs, and the freedom to monitor their investments at any time of day.
Investing time and money into online trading comes with a lot of learnings – many of which are new terms and concepts. One such term is “Stop Loss” or “Stop Orders.” Stop Loss is an automatic order to buy or sell a security that is executed directly once a specified price is met. The specified price is called a stop price and it is usually set by the trader and its main aim is to limit potential losses. Once the stop price is met, the stop-loss turns into a market order which translates into the trading of the security.
Because stop-loss is an automated process, traders do not have to worry about constantly monitoring their deals; they just have to strategize well and leave the trading to take care of itself. This may sound appealing, and while stop-loss orders have many advantages, they also have some flaws as well. It is important to be wary of them.
Pros of Stop-Loss
- Stop-loss orders are completely free-of-charge for traders looking to buy or sell. They come with no brokerage extra fees.
- Stop-loss orders offer you control over your investments, allowing you to decide what amount you’re willing to risk.
- Stop-loss orders can save you time that would otherwise be put into monitoring the market at all times which can be very stressful.
- Stop-loss orders can limit losses by withdrawing securities if they don’t perform up to expectations.
- Stop-loss orders are easy to implement.
Cons of Stop-Loss
- Setting a stop price doesn’t mean that the trade will take place under your conditions. The market is fast paced which means that you might have to buy/sell at a price that is lower/higher than your initial expectations. If your stop order is not met, your trade will occur at the next available price – which may be higher or lower than your expectations.
- With the trader’s inability to set the stop loss order at the correct level, a slight dip in the security’s price could trigger the stop order – even if the security has the potential to recover.
- Due to the above, you might end up paying more, rather than less.
- You may lose money as market conditions are constantly fluctuating.
- Setting tte trade rate is not easy and requires a well-thought-of strategy to ensure your losses are minimal, which can be difficult.
Acknowledging the pros and cons of stop-loss orders can be very beneficial to your overall investment goals. The main aim should be to minimize costs and maximize wins from your investments. To do that, a good understanding of the market and online trading systems is essential.
If you’re looking for some help in the world of trading or don’t know where to start, get in touch with Tradepedia today. We offer learning, coaching, and mentoring programs of different kinds. Through a series of thoughtfully designed step-by-step learning modules, methodologies, and tools, we will help you take your trading game to another level.