Help CenterA 'stop-loss' order, formally referred to as a 'stop closing order,' is a tool employed by traders to either restrict losses or secure the remaining profit on an existing position. This order plays a crucial role in risk management during trading.
Stop-loss orders come with instructions to execute the closure of a position through buying or selling an asset, depending on whether the trader is in a long or short position, once the market reaches the specified price known as the stop price.²
Consider a scenario where our trader acquires an option on a stock and sets a stop-loss order 5% below the purchase price. In the event that the stock subsequently experiences a 5% decline, activating the stop-loss, the stock is sold at the best available price. If, on the other hand, the trader had taken a short position on the stock, the position would be closed through a compensating purchase when the asset begins trading at the designated price.