How is a Stop Loss Order helpful in trading?
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%.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
