Posted 1 year ago | by Ben Armstrong
How to: Use Stop Loss Orders with Leveraged Trading
Leveraged trading can be a great way to make even more money when you are trading cryptos. While leverage can magnify gains, it is vital to understand how to limit risk. One of the best tools to use when making trades is a stop-loss order.
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What is a Stop-Loss Order?
A stop-loss order forces the sale of a position when the price hits a given level. A stop-loss order is used by a trader to limit their loss on a position, which is vital for leveraged trading.
For example, you set a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%. You purchased Bitcoin at $7000, then entering a stop-loss order for $6300. When the stock falls below $6300, your Bitcoin will then be sold at the prevailing market price.
A stop-loss order is an automatic trade order to sell a given position at a specific price level only and can limit losses. When a trader is on a margin, this is even more important. Make sure to account for losses when you open a trade, so your account isn't wiped out.
How to Use a Stop-Loss Order?
You need a back-up plan to limit your risk on a trade and a stop-loss order is a crucial part of that plan.
There are two ways to use stop-loss orders:
A Stop Loss Market Order is the type of stop-loss order that is typically used.
A market order is automatically sent by your broker to close the position at the current price once the price of an asset reaches or goes past your stop-loss price.
However, in fast-moving market conditions or with a very thinly traded stock or asset, the trade could be quite different than the expected stop-loss price.
Some traders may prefer to manually exit trades since they want to exit when conditions are favorable, instead of automatically exiting their position in unknown conditions from a market stop-loss order.
Stop Loss Limit Order is different from the stop loss market order. It will close only at the stop loss price or better. This eliminates the slippage problem but creates a bigger one since it doesn't get you out of the trade when the price is moving aggressively against you.
If you're going to use a stop-loss order, let use stop-loss market orders, not stop loss limit orders.
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