A stop loss is an automated system that places a “stop” order for your trade once the price of the asset reaches a certain level.
This means that if you are buying on the market, your buy order will only be executed when the price rises about the stop price. If you are selling, it will cut losses and sell below a set stop price.
A stop loss can be helpful in protecting profits but it can also mean that you get out of a position that is about to go up in value. In this way, it can be dangerous if not used properly.
In forex trading, stop loss levels are usually set at round numbers such as 0.0001 for currency pairs and 50 points for a stock index. This allows the trader to place a limit on their loss in the event of a stop loss level being breached.
Trading platforms will allow you to set up your own stop loss levels in order to outline where you want the system to close out your current market position. If this is not done, then the broker-dealer has no obligation to do it for you. In general, the smaller the stop loss level, the higher the risk of getting out of the position too early.
For example, most trading platforms will allow you to set your own stop loss level on shares at around 200 points or less. This means that if the price goes down it will close (exit) automatically. The further away from this amount is your trigger point, the greater the chance that you will make a loss.
On the other hand, if your stop loss level is too far away from this 200 points threshold, then it can mean that you hold on to a position for too long which results in an unnecessary reduction in your initial capital.
Most cryptocurrency platforms have a stop loss feature and you’ll find it on Binance, FTX and Kucoin.