What is a stop loss order?
A stop loss order helps you limit your risk on a trade by placing a conditional order to buy or sell a stock when it reaches a certain price. It's especially useful for investors who are not monitoring their holdings daily.
How is a stop loss order helpful in trading
Let's say you buy $Coinbase(COIN.US)$ at $244. From an analysis of support and resistance levels of $Coinbase(COIN.US)$ you already know that the support level for $Coinbase(COIN.US)$ over the past 3-month period is $232.40. To limit future losses, you can place a stop loss order to sell your $Coinbase(COIN.US)$ stock if it reaches (say) $232.
If you're using a simple market order, your $Coinbase(COIN.US)$ stock will sell at the market price once your stop order is triggered. If you're using a stop limit order, your order will execute at the limit price specified by you. In the above example, $232 is the stop price which converts the stop order into a sell order. The limit price will then convert the sell order to a market order if the market conditions are right.
Protips when placing a stop loss order
Keep these in mind when placing a stop loss order:
Support and resistance levels and moving averages can help you determine the right price for the stop loss order.
Stick to your trading plan. If your plan calls for a buy-and-hold strategy, then a stop loss order may not be right for you.
A potential disadvantage can be that short-term price volatility can trigger the stop price. To prevent this, analyze historical price patterns to identify the range of fluctuations of a stock. If it typically fluctuates 5% or more every week, consider specifying a stop price above 5%.