A stop loss order can be an important tool in your trading strategy, as it automates the trading process, and can be used in many market situations. When using a stop loss order, you gain the piece of mind that if a stock price falls within a preset limit, the security is automatically sold.
Stop loss orders can act as a form of insurance, putting a limit on an investor’s losses. The investor decides the parameters of the trade in that fits within their unique trading strategy. For example, if an investor purchases shares of a company for $100 and set their stop loss for 10%, if the shares fall below $90 the security will be sold.
There are many good reasons for using a stop loss order in your trading strategy, as well as different types of stop loss orders that you can use. Deciding between the different types of stop loss orders will depend on your individual trading plan, and risk-tolerance.
Using A Stop Loss Order: Different Types Of Stop Loss Orders
Stop loss orders come in two types: stop limit orders and stop market orders. If you are using a stop loss order, it is important to consider which of these stop loss orders you would like to use.
While they are set up for the more experienced investor, a stop limit order offers more control over the ultimate sale price of a position. A limit order will automatically be placed when a trigger price is reached when a stop limit order is used.
With a stop market order, once the order is activated, it will automatically sell the allotted shares at “the market”. When a stop price is set, once the security reaches the pre-set price a market order will be placed immediately to sell the selected position.
Reasons For Using A Stop Loss Order
Stop loss orders are used primarily to insure against losses in your portfolio. A stop loss order executes automatically when pre-set conditions have been met, thereby simplifying the trading process. When you are using a stop loss order you do not have to sit and watch your computer all day, and you do not have to worry about sudden drops in a stock price taking you by surprise.
Stop loss orders also promote disciplined investing, and consistency often leads to long-term success and financial gains. These types of orders also keep things simple, as they are designed to be set and forgotten. Because the stop loss order automatically tracks the stock price, you can keep the sell aspect of trading to a minimum.
By removing emotions from your trading, you can also better position yourself for trading success. Using a stop loss order eliminates the emotional or fear based trade by acting as a set-in-stone strategy. In addition, these orders also give investors the flexibility of position management, and the ability to maximize losses at a pre-set level.
It is because of these reasons, using a stop loss order in your trading plan can help you mitigate risk, and realize greater returns from your investment strategy.