(This is a very common question among beginners!)
Stop loss, usually called stop-loss orders, are orders that automatically reduce a trader’s order volume if the price of an asset becomes too high. For example, if the price of gold rises, an investor might want to sell their coins instead of holding them at $1,000 (just as with gold futures prices), but by not sending them that order to the market, they have to take money out of their pocket and pay the broker with that loss – which could be several percent of the value of that order.
If you do not have a stop loss, traders usually have to use their own knowledge regarding the current liquidity of their order to avoid getting into a loss they can’t afford.
In the article below, we will talk about the various types of stop losses that trade houses use with customers and we will use the example from above where a trader was doing a 100% stop and got paid on his stop loss orders.
This article can be a great start for traders when they start trading with brokerages like BATS or AMEX.
For a deeper read on stops, check out our article Stop Loss Basics.
What happens as a result of a negative stop?
As a trader starts seeing a negative price move, a stop loss would be triggered, to automatically reduce the volume that would otherwise be sent to the market. It is important for us to understand that a stop loss is triggered when the price is near its target (i.e. it is above the stop).
We see this every day with the stock market, when stocks trade down by a negative amount. The market goes “under-cover” and the price is put into a negative position. If the market recovers quickly, then the stop loss would not be triggered. Conversely, if the market is closed and the market price has not stabilized yet, a stop loss would also not trigger. If you have followed a lot of trading, you could probably guess the type of stop loss you are about to see.
Keep in mind that there are two types of stop loss orders. The first type of stop loss, called a stop-loss order, is simply an order to sell one or more options, and a stop loss will always be triggered when the price of one or more options drops. This type of stop loss is different for every market and depending on market conditions. Some markets, for example, will cause more trade execution for a stop-