Watch our video on how to place a stop loss order.
Knowing how to place a stop loss order in trading is really important. Stop losses are a great way to help with risk management. As a new trader, you can implement them as a way to keep emotions from taking control when trading, however, we are huge proponents of using mental stops over physical stop orders.
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 price falls, it triggers and sells.
A stop loss order is one of the little things in trading people may not view as important. It can end up making a world of difference. Hence the need to know how to place a stop loss order.
You need to know how to place a stop loss order to either limit risk and protect profit. If you don't limit risk, you won't be successful in the stock market. In fact, 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. Read our post on the difference between market order and limit order.
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 cancel).
This way the order will be in there as long as you're holding 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.
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 give your profits back if bad news comes out.
This way you protect your profits. You may take a little bit of a loss but in the long term, you gained a lot more than you lost (bookmark our penny stocks list and stock watch lists pages, which are updated daily).
Any trader, no matter how successful, is going to 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.
You need a plan to get into and out of a trade. If you're trading without a goal, you're trades will be hit and miss. This is where a stop loss comes into effect. Hence the 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 you want a piece of the action.
Usually those moves tend to reverse as soon as you get in because it's 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.
After learning how to place a stop loss order, you need to know where to implement it when stock trading. There are a couple 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.
If price breaks above or below VWAP, you can use that as a stop loss. 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 as well as price movement.
Stop losses are great when you don't have the time to watch your trades. If you get busy at work or at home, a stop loss will help to either protect profits, break even, or take a small loss. As a result, know how to place a stop loss order.
It's a great tool if you trade at work. If you get called into a meeting or take a break, you're covered (try our stock picks service for 14 days free).
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 really need to. If a stock has a history of volatility, set your stop with some leeway.
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 it triggers, it very well could sell at $2.30 because that's the current market price.
Now that you've learned how to place a stop loss order, you can manage your risk. It's one of those small things that can make a big difference. Take our free online trading courses.