Pros and cons of stop orders
Pros of stop orders
Using a stop order is a great way to manage your positions without having to constantly monitor the markets and be there at the exact moment of execution. The key is to choose a stop order level that allows your asset to fluctuate in price while still protecting you from downside risk.
Stop orders also help you trade without the risk of emotional influences. By setting your exit level and automating your trade, you can remain neutral – meaning there is no risk of you keeping your position open in the hope that the asset will bounce back in price, while accumulating unnecessary losses on your position.
Cons of stop orders
When selecting your stop order level, it is important to realise that this is no guarantee of execution – basic stop orders can incur slippage when opening and closing positions if there are large movements or gaps in the market. So, if your level is reached, your stop order will be filled at the best available market price, which could be different from your desired price.
If you elect to use a stop order, and the market movement is only temporary, you may lose out on potential profit. For example, if your stop-loss order closes out your position only for the market to rise in value again, your trade would have closed out at a loss before it had the chance to return to profit.