Knowing how to place a stop-loss order in trading is important. Stops are a great way to help with risk management. As a new trader, you can implement them to keep emotions from taking control when trading; however, we are huge proponents of using mental stops over physical stop orders.
How to Place a Stop Loss Order
What is a stop loss? It’s an order placed with your broker to sell a stock when it hits a certain price. For example, you place a trade but are only willing to risk losing 10 cents. Place a stop loss with a 10-cent buffer. So, if the price falls, it triggers a sale.
A stop-loss order is one of the things people may not view as important in trading. It can end up making a world of difference. Hence, there is a need to know how to place a stop-loss order.
You must know how to place a stop-loss order to limit risk or protect profit. If you don’t limit risk, you won’t be successful in the stock market. Placing a stop loss is easy.
Typically, you can place the stop loss order when you place the trade. It’s important to know what type of orders you can place.
Placing a stop automatically makes your sell order a market order. As a result, you’re selling when the market is at a certain price. If you’re using swing trading techniques, you can set the order to be a GTC (good ’til canceled). This way, the order will be there if you hold the stock. You won’t need to renew it. As your stock price rises, move the stop loss upwards—that way, you don’t give back all those profits.
Stop Loss Order Example
For example, you bought a stock at $10 with your stop at $9. It’s now trading at $15 and still has room to go. As a result, you can move your stop loss up to $14.50. That way, you don’t return your profits if bad news comes out.
This way, you protect your profits. You may take a bit of a loss, but you gain much more in the long term than you lost.
Any trader, no matter how successful, will make a bad trade. Even the best traders fail 30-40% of the time. The difference between a successful trader and a non-successful one is a plan.
It would be best if you had a plan to get into and out of a trade. If you’re trading without a goal, your trading will be hit-and-miss. This is where a stop loss comes into effect. Hence, there is a need to know how to place a stop-loss order.
If you get a bad entry on a trade, your stop will get you out with minimal losses. Then, you can get back in on a better entry. Sometimes, you get FOMO. You see a stock running and want a piece of the action.
Usually, those moves tend to reverse as soon as you get in because they’re at resistance. That’s where a stop loss can protect you. It stops you out, and you can go back in on a better candle.
Where Should I Put My Stop Loss Order?
After learning to place a stop-loss order, you must know where to implement it when trading. There are a couple of different strategies for this. It all depends on what type of trader you are. Day traders may implement the VWAP trading strategy, whereas a swing trader can use the simple moving average formula.
You can use that as a stop loss if the price breaks above or below VWAP. Price usually gravitates back to VWAP when it gets far away from it. As a day trader, this would be a good place to implement a stop, depending on your entry.
The simple moving averages also provide equilibrium to stocks. As a swing trader, it’s imperative to be aware of these moving averages and price movements.
Positives and Negatives
Stop losses are great when you don’t have the time to watch your trades. If you get busy at work or home, a stop loss will help protect profits, break even, or take a small loss. As a result, I know how to place a stop-loss order.
It’s a great tool if you trade at work. You’re covered if you get called into a meeting or take a break.
One of the negatives of a stop loss is volatility. A stock can drop a certain amount in seconds and then go back up. That triggers the stop, and you’ve taken a loss when you didn’t need to. If a stock has a history of volatility, set your stop with some leeway.
Final Thoughts
Another thing you should remember is that your stop loss becomes a market order. So once the trade is implemented, your trade is the current market price and not the stop loss price.
In other words, if your stop loss is set at $2.50 and triggers, it very well could sell at $2.30 because that’s the current market price.
You can manage your risk now that you’ve learned to place a stop-loss order. It’s one of those small things that can make a big difference.
