Stop Loss Orders

stopThe stop loss order is used in order to trigger the automated exit point and its level is decided in advance by a trader. One example is buying at $4 and the stop loss order being set at $3.50. As soon as the stop loss is reached, the signal to sell is activated and the provider of the CFD will take appropriate actions, as long as it’s in accordance with the liquidity which is on the market and their business terms. The value of the stop loss is usually received either online or via the telephone and it’s placed on the market, so it can be auctioned at a price that is determined in advance. It can be sold within a certain range of prices, as long as there is sufficient liquidity. In some cases, the price of the stop loss is triggered, but the price will go outside the range which was set too quickly, or in some cases there isn’t enough liquidity when you consider all the people with similar stop loss orders. In such a case, the order to sell might not take place and you would remain in the same position.

The market makers can manage your stop loss and as soon as it is triggered they can try to close your position as soon as the quantity and the price are matched. You have a better chance at exiting your position, but you might get a small price than you hoped.

The stop loss order and its price have one big problem and that’s the fact that this is a target price. If that market will trade at the level which is specified it’s OK, but sometimes it doesn’t. The price can move with a large step directly past the stop loss price, so sometimes it will get executed at another price or sometimes it will not be traded at all and that depends on the provider of the CFD. If the products which are traded are very active, like currencies or indices, this is usually not a problem. It can be a problem with the low liquidity that some stocks suffer from. Whenever the stock market is closed it can also be an issue, if there are big differences between the closing price and the opening price from the next day.

In some cases you can use GSLO, which is a stop loss order which is guaranteed. This is a product offered by a number of CFD providers. In order to use it, you have to pay extra and they guarantee you the price in case the stop loss order is triggered. You do have to pay more for this option though and it’s quite limited, since you can only place the order for stop loss within 5% of the price. There are also a number of conditions and terms which have to be met, but in some cases a GSLO might make sense.

CFD trading has its advantages, such as the leverage which can be used during trades, but it has its risks as well, and the stop loss orders are the tools you can use to minimize that risk.

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