When trading in most derivatives stop orders are always a recommended function to as a way for loss management.
This holds true for CFD trading as well.
Contracts for Difference trading involves trading on margin, stop loss, stop and limit orders allow for the opening or closing of positions when and if a certain level is reached.
A stop order is in simple terms an order you have set to buy or to sell CFD when the underlying asset reaches the specific price you have set.
There are two forms of this order; 'buy stop order' and a 'sell stop order'.
Where as the buy is used to make a profit on short positions, and is always set at a price above the market price, and the sell is placed at a specific price in the event that the market continues to drop.
Stop loss orders are in place to help limit or reduce the amount of loss an investor will incur if the market moves against them.
The trader will decide the amount of loss they are willing to accept.
The way in which this works is that when an investor opens a CFD trading position they will set the stop price.
If the underlying asset reaches that price the stop order is placed and it becomes a market order.
Limit orders are used to enter or exit positions.
These are used so that the investor does not have to pay prices higher or lower than what they wish to on the underlying asset.
The limit order implies you are setting restrictions to the minimum and the maximum amounts you are willing to pay on your positions.
These orders are often only allowed to be placed at specific times during the exchange day.
When the stop-price has been reached, your stop-limit order will then become a limit order.
This order will be to buy or to sell your positions at no more or no less than the predetermined limit price.
As a CFD trader however, you should realize that in the event there is not enough of the underlying product at your limit price, you may only receive a partial order, and in some instances your limit order will not be executed.
If you only receive a part-fill order, the remainder of your position will stay open.
It is important to anyone whom is trading CFDs to understand they know how to determine and set a stop order.
Not doing so can lead to extreme risk to ones capital, especially if trading within a highly volatile market.