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How to Place Stop Loss Order – A Beginner Guide

Knowing how to place stop loss order can protect traders from overwhelming losses. A stop-loss is an automated selling tool that is enabled once the stock price has reached a predefined level. We have already shared some handy information about what stop loss is and how to set it right. This time, you can benefit from a step-by-step guide with all major methods to set the order described alongside tips to avoid losses when using it.

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We will also discuss the pros and cons of using this particular tool and decide when it might be a good idea to set or when it can interfere with the trading tactics. You will learn how to identify a situation when a stop loss order is needed or when it can work against traders.

How to Place Stop Loss Order

#1. The Setup

There are several ways and strategies to use stop loss orders. The choice will depend on your trading goals and tactics. However, either you are a day trader or seek long-term investment opportunities, proper setup is the first step. It starts with learning the basics. For example, traders are supposed to understand the difference between stop loss market and stop-limit order. Besides, you need to clearly understand how the tool works and where to place it. The next stage is to configure the instrument.

Example: Traders can set a specific timeframe for the order. If they fail to sell a stock within that period, the order will be automatically canceled.

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A day order is one of the most popular options, as it helps you close a trade the same day a stop-loss order was placed. Otherwise, traders can opt for a so-called “good till canceled” or GTC order. It works well for long-term strategies that may last for 30 or 60 days. The key benefit here is that you do not have to set a new order from the blank and use the same one over and over again instead.

#2. Price Calculation

The second step is to have the stop-loss order price calculated. This is where different chart patterns may come in handy highlighting the daily ranges of a particular asset of a specific period. At this stage, traders can overview the ranges with stock price major lows, or highs. Then, you need to calculate the average price and set a stop loss within approximately 4-7% of the middle trend line.

To make the process a bit easier, beginners can benefit from top technical analysis books that describe the process of price calculation and other technical tools in detail using real-market experience shared by some of the most successful investors.

#3. Stop Loss Order Placement

Now, you are ready to place a stop-loss order. Simply follow these easy steps to complete the task:

  1. Enter a trading account.
  2. Go to the section where you can place a new trade.
  3. Choose a “stop loss order” instead of the “market order”.
  4. Set a price that will trigger the order.

#4. Relax

Once the order has been set, you have nothing to worry about. Your broker will take care of the order execution as per preset parameters (price or timeframe). Keep in mind that the tool will have no sense if a traded stock does not perform crucial movement either up or down.

Things to Avoid When Putting a Stop Loss

After we have learned how to put stop loss order, we need to highlight some of the most common mistakes that may lead to even bigger losses. Generally made by beginners, that can make you end up selling helplessly without even the slightest profit:

  • Analyzing historical data – underestimating the past history of the stock is a crucial mistake. Historical data can help you predict the next stock price movement or at least understand if it has ever experienced rapid turnovers or moves in the previous period.
  • Never use stop loss for gapping stocks – the tool will have no effect for stocks that gap. In other words, if the price grows higher by the end of the day and the overnight price drops drastically, the stop-loss order will be triggered unexpectedly resulting in subsequent sales instead of gaining profit the next opening day.
  • Renew and update your orders – this one works only for day traders. All-day orders expire by the end of the trading day even if they have not been triggered. For this reason, they require daily renewal.

The Bottom Line

The good news is that stop-loss orders prevent traders from daily price monitoring. They use preferable price and period parameters that trigger the asset’s sale. Another benefit is that the tool is available at no cost as a part of your brokerage offer or MT4 functionality. Brokers charge commission only when the sale is completed and a stop-loss order turns into a market order.

On the other hand, the instrument never guarantees risk-free trading, especially when it comes to the rapidly falling market. Besides, the tool cannot be used with some specific assets such as securities, for example.

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.