Stop-loss orders are a great way for investors to maintain their trading discipline. The idea is that if the price of an asset drops to a certain level, it may be a sign of trouble and some investors may be tempted to keep investing in the hopes of recovering their losses. A stop-loss order eliminates this problem by automatically exiting the position when the price reaches a certain level. At first, this may seem counterintuitive. For example, if you use a stop-loss order on an ETF that is temporarily trading at a discount to its net asset value (NAV), your position will be sold when the ETF offers a discount.
However, this is not necessarily a bad thing. You could try implementing an arbitrage strategy, but this is complicated and requires liquidity, speed, and a lot of capital. Other types of orders may also be available, but they may not be as effective. In conclusion, stop-loss orders can be a great way to maintain trading discipline and manage risk. They can help you avoid getting stuck in a position that is losing money and can help you take advantage of opportunities in the market.
However, it is important to understand how they work and how they can affect your trading strategy before using them.
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