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How and Where to Place a Stop Loss Order?

A stop-loss order is one of the main factors in regard to your risk-management strategy. If used properly, it can result in a lower-risk trading approach. It was designed to prevent investors from capital losses in case the position makes unexpected or unpredictable moves. The main benefit of using stop-loss orders is that you will not need to monitor all running positions and holdings round-the-clock.

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When set, a stop-loss order will be automatically triggered when the market performs pre-set conditions. Today, you will learn how to place a stop-loss order as well as its major types.

What Is a Stop Loss Order?

A stop-loss order is a tool designed to help traders limit their risks on each trade. You always need to have a Plan B despite the strategy you use. An exit plan will help you save the capital even when the market moves against you. So, with this tool, traders get a type of offsetting trigger that will automatically exit an underlying trade if something goes wrong or when a security reaches a specific price level.

For example: let’s say, you want to purchase a stock at $30. To prevent losses, you lace a stop loss at the level of $29.50. It means that you will automatically exit a trade once the price has reached $29.50, which will prevent you from further losses. If the price keeps standing below $29.50, the stop loss will not be triggered.

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Here are some key points you need to consider when using different types of stop-loss orders:

  1. It helps you minimise risk on every trade.
  2. Once security has reached a certain price level, a stop loss order triggers the exit.
  3. There are several types of stop loss orders. They include market, limit, trailing stop-loss, and some other types of orders.
  4. Choosing a level for the stop-loss must be a strategic solution based on your techniques. A good idea is to use several methods to reduce the risk drastically.

Now, let’s have a look at major types of stop loss orders.

Major Types of Stop Loss Orders

Basically, we can use various methods. However, they are all divided into two major categories: market.

  • Market Orders – a standard type of stop loss orders that will be triggered once the security has reached a pre-set price level despite the price it was or will be available later. It can lead to certain risks as well. While there is no one to take your securities off your hands, the price can go worse than you have expected. Experts call this situation a slippage. The good news is that such a situation is hardly a typical issue for those who prefer trading currencies, futures contracts, stock, and other popular instruments.
  • Limit Orders – unlike the previous type that closes a trade at any price that exceeds a pre-set level, limit orders will trigger the market exit only in case of the stop-loss price or better level. This is actually a good way to prevent slippage. On the other hand, traders will not have a chance to exit a trade in case of an aggressive and rapid price movement, which can even be a bigger problem, especially if the market starts moving against you.

How to Place a Stop Loss Order?

Considering some issues that can occur when using two major types of stop losses, the most important question is actually where and how to place them. It depends on whether you want to enter the market with a long or short position.

How to Place a Stop Loss Order When Purchasing?

Beginner traders often make the same mistake and place a stop loss randomly. At the same time, even a properly-set stop loss can easily get you out of a position when the price moves against you though it still reserves some room for fluctuation.

Using a “swing low” is the safest and simplest method of placing stop loss orders when buying. It refers to the situation when the price drops and quickly bounces back.

How to Place a Stop Loss Order when Selling?

Again, even when going short, you are never supposed to set a stop loss at a random level. Just like in the previous situation, you might still want to reserve enough room for the market to fluctuate. On the other hand, you are well-protected from a loss if the situation gets out of hand.

Oppositely to the “low swing” when buying, using a “high swing” to place a stop loss order works best when selling. The situation happens when the price goes up and drops.

The Bottom Line

Stop loss orders help to trade with lower risk though they do not guarantee 100% safe order execution. To make the most of these risk-management tools, you should never use random levels to place them. Furthermore, it is better to apply several types of stop loss orders to make your strategy even more effective and risk-free. Also, never underestimate the role of practicing. Try out your strategies and test different approaches to work out the most effective trading technique.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.