Sometimes it’s the simple things that make all the difference to trading performance – and one of the simplest is using stop-loss orders.
Imagine you’re using CFDs to trade a really volatile asset such as bitcoin. Suppose you have positioned yourself to benefit from a fall in the price of bitcoin because you´re worried about increasing regulation.
You enter a sell CFD position to benefit from the price fall, but what if the price moves sharply against you?
A stop-loss order can enable you to limit your losses by closing out the position automatically, in this case when the price of bitcoin rises to a certain level.
Risk management
Stop-loss orders, sometimes also referred to as a “stop order” or “stop-market order”, therefore give you the freedom to manage risk, setting a cap on the loss you’re prepared to incur on each trade.
With something as volatile as bitcoin, the wider the adverse price movement you are prepared to tolerate, the more likely it is that your position will at some point in the trading day move into profit.
And it is important to remember that your stoploss order must be set outside the bid-ask spread, which itself will be larger the more volatile the asset you are trading.
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Read more: Understanding the importance of stop-loss orders
https://capital.com/understanding-the-importance-of-stop-loss-orders