There are so many factors that you need to consider when buying and selling stocks that it is easy to forget about the small details. And one of those is the stop loss order. However, it is something that can bring many benefits to your bottom line and strategy. Every investor can benefit from this tool in more ways than one, and in any professional portfolio, it is an essential element in the professional trader's strategy.
Before anything else, it is important to know what a stop loss is. In simple terms, a stop loss is the buy or sell order that triggers once the stock reaches a specific price. The goal is to reduce the loss on a position in an underlying asset, whether the trade is buying or selling or long or short as it is known in market terminology.
It can be used in both long term and short term trading. Through a stop loss order, the broker will know when to buy or sell stocks. For instance, if the investor wishes to bid for shares of a certain company at a specific price point, then one instructs the broker to set a price limit against the purchase. Once the stock reaches the price, then the order will be made automatically to buy the stock. The investor can also instruct the broker to sell on stop at the desired price.
Stop loss can also be used to lock in profits. When this is the case, then it is known as trailing stop. In this instance, the order is set at a percentage level below the current market price, and not the percentage of price in which it was bought. The price of the stop loss automatically adjusts as the price of the stock fluctuates. With the use of a trailing stop order, an investor will be able to let the profits run, and ensure that there are some realized capital gains. However, this is not advised when one is trading a highly volatile instrument with large price movements. You will then find that you can be stopped out of the market prematurely and not gain full advantage of your technical strategy.
A buy on stop order is to buy a security when it reaches a price that is above the present offering price. It will automatically trigger once the market price reaches the point. It is used by traders who hope that the stock will continue with its upward momentum. It is similar to a stop loss order in a way. The only difference is that buy stop order is to enter into a long position, while a stop loss order is to get out on a short position.
These are the things that you need to know about stop loss. It is a simple tool that can be used to lock in profits or stop excessive losses. All types of investing styles can benefit from this tool. It should be considered as an insurance policy that you hope that you don’t need to use any time soon.
In today’s markets, the technical trader is a predominant force with the number of technical traders outstripping purist fundamental traders massively. With proper utilization, stop-loss orders can be used for entry and exit points in conjunction with support and resistance levels to determine trades with not only the most profit potential but the best chance of success.