A stop loss order is given when the market is:
a. Highly volatile
b. Experiencing a downtrend
c. Experiencing a bull run
e. None of the above
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A stop-loss order is placed when the trader wants to limit the losses made. These are usually used when there is a lot of leverage involved in the transaction made. As (1) the funds that have been borrowed to execute the trade have to be returned on time and as (2) it is not possible to hold onto the security while waiting for a reversal in price to recover, a stop-loss is used so a limit is placed on the losses that the trader can afford.
The correct option for the question would be option e, none of the above.
A very high level of volatility can make the price fluctuate upwards and downwards. Placing a stop loss would not serve any purpose as the position could become profitable after a very brief interval of time.
A downtrend or a Bull Run could make a trading position unprofitable or profitable based on whether the trader has gone long or short.
Inactivity would not allow any trades to take place, whether a stop-loss order has been placed or not.
The primary reason a stop-loss is used is to accommodate for the use of leverage (borrowing, margin) if it is not possible to hold onto the position and wait for a reversal in price to make the position profitable again. Stop-loss orders can be essential in many situations but in others may lead to losses that could easily have been avoided if the stop-loss order had not been placed. It requires a lot of experience and skill to determine what should be done and when it should be done.
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