How Does a ‘Stop-Loss’ Order Help Manage the Risk of Liquidation?

A stop-loss order is an instruction to automatically close a position when the market price reaches a specified, less favorable price. In leveraged trading, setting a stop-loss above the liquidation price is a critical risk management tool.

It ensures the position is closed before the margin is completely depleted and the automatic, often costly, liquidation process is triggered. This allows the trader to limit their losses to a predefined, smaller amount.