Which type of order is typically used to limit losses?

A stop loss order is a specific type of order that is used to limit potential losses on a trade. When a trader sets a stop loss order, they establish a predetermined price at which the order will automatically execute if the market price reaches that level. This helps protect the trader from exceeding a certain loss threshold on their investment, providing a safeguard against unfavorable market movements.

The functionality of a stop loss order is particularly important in volatile markets, where prices can fluctuate dramatically and quickly. By using a stop loss order, traders can avoid making emotional decisions during market downturns and ensure that their positions are closed at a specified limit, thereby minimizing further losses.

In contrast, market orders are intended to execute immediately at the best available price, without any consideration for limiting losses. Limit orders specify a maximum or minimum price at which a trader is willing to buy or sell, but they do not inherently provide a mechanism to cap losses. Price orders are not a recognized term in trading practice, further indicating the importance of accurately identifying order types that serve specific purposes.