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.
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.
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.
Here are some key points you need to consider when using different types of stop-loss orders:
Now, let’s have a look at major types of stop loss orders.
Basically, we can use various methods. However, they are all divided into two major categories: market.
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.
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.
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.
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.