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Stop-Loss Order

A stop-loss order is a sophisticated order execution strategy. A stop-loss order is usually employed when a trader has a long position in an asset, but it can be used in other situations too. If the trader has realized a specified amount of financial loss on the trade, then the stop-loss will automatically close out the position by trading the asset at the current market price.

If the specified loss amount is never reached then a stop-loss will not result in an executed order. Stop-losses are used to cap the potential losses associated with a certain position. This is useful for managing risk, especially when coupled with other financial tools.

However, like any financial trade, there are risks with a stop-loss order. If an asset were to lose value and then regain value quickly, the stop-loss could exit the position near the bottom, causing the trader to miss the upside when the asset regains value.