Stop loss orders can be used as a great tool for investors
in different kinds of market situations.
If you know how to use it properly, you can integrate it into any
strategy. It may even help you automate the
process of selling.
In this article, we’ll get to know stop loss orders better,
and you’ll find out why you definitely need to use this in your trading.
What are Stop Loss Orders?
Stop loss orders are oftentimes compared to free insurance
policies. This is because it can save
you some money in case the trade does not go as planned.
In the stock market, this means that if you’re holding 100 shares
of company A at $100 per share and you don’t want to lose more than 10 percent
of your investment, then a stop loss order will automatically sell your shares
if A drops lower than $90 at any
time.
In other words, a stop loss order can put a cap on your
potential losses.
Stop Order Types
In general, there are two types of stop loss orders: stop
market orders and stop limit orders.
Stop market orders will sell the shares allotted at the market
the moment the order is activated. If the
stop price is $50 per share, then once the stock reaches this predetermined
price, a market order will be placed instantly to sell the desired position.
Stop limit orders, on the other hand, will automatically
place a limit order when the trigger price is hit. When you place a stop limit order, the investor
needs to find out what limit order you want.
This is usually a setup for more experienced investors since it provides
more control over the final sell price of the position, though it also comes
with some extra risks.
Why You Should Use Stops
There are many reasons investors should use stop loss
orders.
Insurance
As mentioned above, stop loss orders can be used as free insurance
against losses. This is the primary
reason many investors take advantage of stop orders.
Automated trading
Investors don’t have to worry about being present for a stop
loss to be triggered.
Spurs Discipline
Since you’ll be compelled to stick to a strategy, investors
can become more consistent and successful in the longer run. This can very well be a method of minimizing losses
every trade.
[READ FURTHER: 5 Day Trading Rules for Dummies]
Simplicity
It’s very much like the “set and forget” approach to
trading. There is very minimal complexity
in the system as long as you’ve familiarized yourself with the characteristics
of every stop order and trade.
Flexibility
Different traders can use stop loss orders in many different
ways. For more advanced traders, the use
of stop limit orders provides further options on how to maneuver a position if
the stop level has already been triggered.
Plucks Market Emotions
If a trade listens to his or her emotions (fear, greed,
excitement, anxiety) all the time, he couldn’t expect to be successful in
trading in the longer haul. Stop loss
orders can remove emotions altogether.
Conclusion
Stop loss orders are an investor’s friend because it helps
traders control and minimize their potential losses in each and every
trade. With ample knowledge about the
ways to maximize its uses, a trader will find that he or she is insured against
large losses.
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