A stop-loss order is an order made with a broker or online exchange to purchase or sell a certain stock or cryptocurrency at a predetermined price. A stop-loss order is intended to restrict an investor’s losses on a securities holding. Setting a stop-loss order 10% below the price at which you purchased the stock, for example, will restrict your loss to 10%. Assume you just acquired Facebook shares at $70 per share. You place a stop-loss order for $61 immediately after purchasing the stock. If the stock price goes below $61, your shares will be sold at the current market price.
Stop-limit orders work in the same way as stop-loss orders. Nevertheless, as the name implies, there is a price limit at which they will execute. A stop-limit order specifies two prices: the stop price, which converts the order to a sell order, and the limit price. Instead of becoming a market order to sell, the order is converted into a limit order that will only execute at the limit price.
Why Choose a Stop Loss?
An essential advantage of a stop-loss order is that it is free to use. You save money by not spending any at all. Your usual commission is only paid when the stop-loss price is met, and the stock has to be sold. A stop-loss order might be thought of as a complimentary insurance policy.
Another advantage of a stop-loss order is that it removes emotional impact from decision-making. People tend to fall head over heels in love with certain stocks. For example, people may believe that it will turn around if they give a stock another opportunity. In reality, this delay may only increase losses.
Whatever style of investor you are, you must determine why you hold a stock quickly. The requirements of a value investor will vary from those of a growth investor, who will differ from those of an active trader. Whatever method you choose, it will only be effective if you stick to it. As a result, if you are a die-hard buy-and-hold investor, your stop-loss orders are almost meaningless.
At the end of the day, if you want to be a successful investor, you must have faith in your plan. This entails following through on your strategy. Stop-loss orders have the benefit of keeping you on track and preventing emotion from clouding your judgment.
Lastly, keep in mind that stop-loss orders do not ensure that you will earn money in the stock market; you must still make sound investing judgments. If you don’t, you’ll lose the same amount of money as if you didn’t have a stop-loss.
Disadvantages of a Stop Loss
The biggest downside is that a short-term movement in a stock’s price may cause the stop price to be activated. The goal is to choose a stop-loss percentage that permits a stock to move daily while avoiding as much negative risk as feasible.
Setting a 10% stop-loss order on a stock with a history of fluctuating 20% or more in a week may not be the greatest approach. Most likely, you’ll only lose money on the fee produced by the execution of your stop-loss order. This proves that you need to understand the market and the stocks you are investing in, even when creating a stop-loss order.
There are no hard and fast guidelines for setting pauses; it depends entirely on your investment strategy. A 5 percent level may be appropriate for an aggressive trader, but a 15 percent or higher level may be appropriate for a long-term investment.
Another thing to remember is that once your stop price is reached, your stop order becomes a market order. As a result, the price at which you sell may be significantly different from the stop price. This is particularly true in a volatile market when stock values may fluctuate quickly. Another limitation of the stop-loss order is that many brokers do not let you put a stop order on certain securities, such as OTC Bulletin Board stocks or penny stocks.
Stop-limit orders pose additional hazards. Although these orders ensure a price limit, the deal may not be performed. If the stop order activates, this might be dangerous for investors in a quick market, but the limit order is not filled before the market price pierces the limit price.
If a corporation receives terrible news and the limit price is just $1 or $2 below the stop-loss price, the investor must hang onto the shares for an indefinite amount of time until the share price recovers again. Orders of any sort may be submitted as day or good-until-canceled orders.
What is Coinbase Pro?
Coinbase Pro refers to Coinbase’s GDAX exchange. The platform remains aimed at institutional and professional investors. But what exactly is the difference between the original Coinbase and the new-and-improved Coinbase Pro? The major goal of the rebranding was to put their whole array of goods under the Coinbase brand name, which is trusted by millions of clients across the globe.
Coinbase Pro supports a broad range of digital currency trading pairings, including Bitcoin, Ethereum, and several other cryptocurrencies, as well as major fiat currencies.
They also sport many positive and helpful features, such as insurance, API support, margin trading, multiple fiat and cryptocurrency pairs, and more.
While Coinbase is a great place for beginners traders to start, Coinbase Pro is designed to cater to more professional traders who know a thing or two about investing, and buying and selling cryptocurrencies.
How to Use Coinbase Pro
If you already have a Coinbase account, you can use your Coinbase login email address for your Coinbase Pro account. This instantly links your Coinbase account and moves money in all currency across your Coinbase balance, and your Coinbase Pro account is incorporated into the experience. Log In to create your account. If you are already signed in to coinbase.com, you will be asked to agree to the Coinbase Pro User Terms and may be asked for further information.
Please remember that a single person may only have one account with Coinbase Pro and Coinbase.com. Please use the same login email address if you currently have a Coinbase account and want to establish a Coinbase Pro account.
Here is a step-by-step process to create your account:
1. Visit pro.coinbase.com to get started
2. Enter your account information, such as your name and email address. You’ll get an email requesting you to confirm your address.
3. After you’ve confirmed your email address, you’ll be asked to input your phone number. Please provide a mobile phone number since you will be needed to confirm the phone number by SMS.
4. You will be prompted to submit your name, date of birth, residence, purpose, source of finances, profession, and employer, depending on the area you are in.
5. You will be required to upload or snap a picture of your government-issued ID.
How to Set a Stop Loss on Coinbase Pro?
It would help if you had an open position to place a stop-loss order. Change the order type to Sell and click the Stop tab. You’ll then see three fields, here’s what they all mean:
- Stop Price: the price at which the order is activated.
- Amount: the set amount you want to sell.
- Limit Price: the price at which you could sell your product.
And here is a step-by-step breakdown of how you can set your very own stop-loss order:
Find the Stop tab on the Orders Form section of your Trade View within Coinbase Pro.
Select whether you’d like to Buy or Sell
Specify the Amount and Stop price at which the order should be triggered
Select a Limit Price
When the stop price is triggered, a stop-loss order will post a limit order at the limit price.
Understanding the difference between stop and limit prices is the most difficult aspect of a stop-loss order. Everything will make sense if you comprehend that.
Two prices are required because one is the trigger, and the other is your targeted selling price. When the market drops, it may happen rapidly and without warning. Having an automatic limit means you will immediately sell your investment when it hits that threshold. That might create savings for you, but they could be surprising.
For stop-loss orders, position your limit price slightly below the stop price. Slippage is the cause. If there are no bidders in that price range, the price may fall below your stop price in certain cases. This is where the limit price comes into play.
Conclusion
Investing in anything in any market can be tricky and, quite frankly, sometimes confusing and scary. It’s hard to keep track of every movement in the value of these commodities. Therefore, a stop-loss order is very important because it can help you keep your money and investments safe.
Simply put, a stop-loss order is a great way to keep your portfolio robust and healthy, and strong automatically. Thanks to Coinbase Pro, you can set the parameters long before the deal is done. Once those settings are decided upon, you can rest easy knowing that Coinbase will automatically purchase and sell.
Stop-loss orders are something that many seasoned investors have used for years to maintain their portfolios automatically. It’s like cruise control for buying crypto, and it can work wonders for your wallet.