When you place a stop-loss order, sometimes referred to simply as a ‘stop order’, you’re instructing your broker to execute a trade on your behalf at a less favourable level than the current market price.
You’ll usually do this to limit your losses on a position, in the event that the market moves against you. Set your stop-loss at a certain level, and your broker will close your position for you when the market hits that level – so you don’t need to watch the markets constantly.
It’s worth remembering that stop-loss orders do not protect against slippage resulting from markets ‘gapping’, or moving a large distance in a split second due to unforeseen external influences. You can ensure your trade is executed at exactly the level specified by using a guaranteed stop. With IG Bank they’re free to place, and carry a small premium if triggered.
If you’re placing a stop-loss order on a long trade – a trade where you’ve bought a market in the expectation that its price will go up – your stop-loss order will be an instruction to sell at a worse price than the one you opened your trade at. Conversely, a stop-loss order on a short trade (where you’re selling a market) is an instruction to buy at a worse price than you opened at.
Where you place your stop-loss depends on how much risk you’re prepared to take on. Watch our video to learn three popular strategies for deciding stop placement, and using them to manage your risk.