Stop Loss Orders and How to Use Them Right
Stop loss orders are a form of conditional orders used in trading. These orders are executed only when certain conditions are met. Stop orders are an excellent way to limit losses and gain control of trading while making the process a bit more automated and easy for individuals who cannot supervise every aspect of a trade. Using stop orders correctly is the best way to maintain control of a trade while eliminating the role emotion can play in the market.
What is a Stop Loss Order?
A stop loss order is basically an order to buy or sell a stock or security when the market price has reached a specified point, or stop price. When this specific stop price is attained, the stop order is then entered as a market order with no limit. This makes the trade go through, although it will not necessarily be at or even near the stop price. The final sell price will depend on how fast the market is moving and if there is enough liquidity available.
Types of Stop Orders
There are two basic types of stop orders: stop limit and stop market orders. Stop limit orders will automatically put a limit order in place when a trigger price is hit. This requires the investor to determine which type of limit order they want, making this option better for experienced investors. It comes with risk but offers a great deal of control over the sell price of the stock. A stop market order, on the other hand, will automatically sell all shares allocated to the market when the order is activated. For example, if the stop price is $30 per share, when the market hits this price the market order will sell.
How to Use a Stop Order
To use a stop-loss order, begin by deciding how much loss is acceptable if the stock suddenly begins to drop in price. Next, using an online investment company to trade, select the stop loss order option while making a trade. Itís important to carefully set the stop-loss limits on the order. For example, if a stock tends to fluctuate ten to fifteen points, itís possible to set the parameters to avoid selling the stock on a normal downswing. Further protection is also available in the form on a trailing stop, which follows the stock as it trades higher to protect profit. Itís also possible to monitor the stock over time and adjust the order as necessary.
One of the biggest benefits to a stop loss order is the insurance it provides against losses. It also allows a degree of automation in trading, perfect for any investor who canít be present when the stop loss is triggered. Many feel stop orders keep trading simple as well, making it possible to set the parameters for a sale that does not require additional input. Stop orders may also promote discipline during trading by allowing the investor to stick to their strategy. In addition, these orders can remove the emotions that come into play for many traders by forcing them to stick to their decision. Lastly, stop orders can provide flexibility for investors with advanced skills who wish to cap maximum losses at a certain percentage.
Stop-loss orders make it possible to minimize loss that can happen when a stock suddenly drops in price. While there is no guarantee on the ultimate selling price, a stop order can offer a great deal of protection. Itís also an excellent way to maintain control of a portfolio and stick to a specific strategy. With stop-loss orders, trading becomes both possible and easy for individuals who canít supervise every sale.