How do ETFs work?
Your guide to how ETFs work and whether this type of investment is right for you.
Read more…What is a stop-loss order?
A stop-loss order could help you avoid big losses on your currency investments.
The exchange rate between a currency pair can change suddenly. These fluctuations could transform a good investment into a poor one — and quickly too.
To avoid losing too much on your investments, especially in volatile markets, consider a stop-loss order.
What is a stop-loss order?
A stop-loss order is a “hedging” tool. When you place a stop-loss order, your brokerage will buy or sell a stock or currency at a price that you specify.
For example, say you buy 50 stocks of Company A for $100 and set a stop-loss order for $80. If the value of the stocks drop below $80, a market order is triggered, and you’re stocks are sold for just under $80.
As another example, if you currently hold the CAD/JPY currency pair and the price is CAD/JPY = 100 (meaning $1 buys 100 yen), you might put in a stop-loss order to sell at CAD/JPY = 98. This means that once the exchange rate hits 1 CAD = 98 JPY, your brokerage will automatically sell your holding.
Why is a stop-loss order useful?
A stop-loss order is used to limit your losses. If you buy a currency holding and place a stop-loss order 5% below the price at which you made the purchase, then the most you can lose on your investment is 5%.
Using stop-loss orders to limit losses from shorting
We’ve already gone over examples of using stop-loss orders to sell currency. Here’s an example for using a stop-loss order to buy currency.
A common strategy in both stock trading and forex trading is shorting currency. Basically, that means you’re hoping a stock or currency will decrease in value.
For example, let’s say $100 buys 1 stock in Company A right now, but you think the stock will decrease in value over the next week. In this case, you could sell the stock immediately, hoping to buy back the stock when it’s less expensive — say, $90. But if the stock value actually increases to $110, you’d be out $10 to buy it back.
To prevent this, you can place a stop-loss order to buy back the stock if it hits, say, $105. That way, if you bet wrongly on the stock price’s movement, you wouldn’t lose as much.
How does this work when trading currencies? Let’s say $1 buys 100 yen right now, but you think the dollar will go down against the yen. In this case, you could sell the dollar for yen immediately, hoping to sell the yen back to dollars at a favorable exchange rate — say, CAD/JPY = 98.
But what if something happens in the world and the exchange rate shoots to CAD/JPY = 115? You have a lot of yen on your hands, but you’d take a big loss if you sold it back for dollars. You can place a stop-loss order to sell your yen for dollars at more advantageous price — say, CAD/JPY = 102. If the price of the currency pair moves against you, at least you won’t lose your shirt from shorting the pair.
Compare stock trading platforms that support stop orders
1 - 4 of 4
Finder Score for stock trading platforms
To make comparing even easier we came up with the Finder Score. Trading costs, account fees and features across 10+ stock trading platforms and apps are all weighted and scaled to produce a score out of 10. The higher the score the better the platform - simple.
Are there any drawbacks?
Though the stop-loss order is nice in theory, in practice it doesn’t always work perfectly. Your stop-loss order could be triggered at a certain price, but you may not actually get that price — instead, your order will be fulfilled at the next available price. That’s because when you’re trading stocks or currencies, there needs to be someone else trading with you.
In fast-moving markets, the next available price means that you may end up losing more than you originally thought you would.
What else should I know?
Some traders recommend that instead of setting stop-loss orders, you should set up price alerts. This way you can decide for yourself what to do next, rather than trigger buying or selling your currency automatically.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
More on investing
How to read stock charts
Learning how to read stock charts and recognize chart patterns can unlock your success as a trader.
Read more…
What are stocks?
Owning a stock means you own part of a company and can potentially grow your wealth. But there is a risk of loss.
Read more…
How to analyze a stock
Learn how to research stocks and find the right investment opportunities in 4 steps.
Read more…
3 strategies for investing in volatile markets
Market volatility can be nerve-wracking. Discover 3 trading strategies plus the pros, cons and risks of investing in volatile markets.
Read more…
Dow Jones vs S&P 500
Find out the key differences between the Dow Jones and S&P 500 plus key points to consider before investing.
Read more…
More resources on Finder
More guides on Finder
-
How to buy Northland Power stock in Canada
Steps to owning and managing NPI stock, with 24-hour and historical pricing before you buy.
-
Best renewable energy stocks
These are the best renewable energy stocks to buy now in Canada.
-
Best stocks to buy right now in Canada
Finder’s unique algorithm found the 20 best TSX stocks to buy right now.
-
10 best stock trading platforms and apps in Canada for 2024
Whether you’re a new or experienced investor, these are the best stock trading platforms and apps in Canada.
-
How to buy IL Makiage stock in Canada when it goes public
Everything we know about the IL Makiage IPO plus information on how to buy in.
-
How to buy ByteDance stock in Canada when it goes public
Everything we know about the ByteDance IPO plus information on how to buy in.
-
How to buy Auvik Networks stock in Canada when it goes public
Everything we know about the Auvik Networks IPO plus information on how to buy in.
-
How to buy Universal Music Group (UMG) stock from Canada
If you live in Canada, you need a broker that provides access to foreign investments to buy Universal Music Group stock.
-
How to invest in the S&P 500 in Canada
Find out how to invest in the S&P 500 in Canada—one of the world’s most popular stock indices—to diversify your portfolio.
-
BMO InvestorLine review
Check out the pros and cons of BMO’s self-directed trading platform in our InvestorLine review.