What does Stop-Loss Order mean?
A Stop-Loss order is a standing order meant to provide protection from excessive losses when trading stocks, commodities, currencies and some other assets. It basically says “Stop this order before my loss become even greater!”
It is common practice for a trader to establish a stop-loss order at the same time they make a purchase. The stop-loss level sets the price to sell if the market goes against you.
For example, if you buy an asset at $50 and are willing to accept a potential 10% loss you would set a stop-loss at $45, just in case the price of the asset went in the wrong direction. This would help manage your losses, especially if you weren’t available to close the order manually yourself.
Some traders also use the stop-loss to protect themselves from their own psychological limitations. It can sometimes be difficult to accept a loss, even if your initial research shows it’s the best thing to do. With a stop-loss in place there’s no need to think about selling at a loss, it simply happens without any second-guessing.