We all know how important is risk management and cutting loses on the stock market. One of the best tools, that can help us are stop loss orders. Stop losses are easy to use and effective. Nevertheless, a lot of investors don’t use them, forget to use them or think that they don’t need them.
How does stop loss order work?
It is simple. You place an order to buy or sell when the stock reaches certain price level. When the stop loss is ready, you don’t have to watch the stock price all the time. Your order would be executed automatically when the set price level would be reached.
For example - set your stop loss 10% below price at which you bought and you limit your loss to 10%.
The advantage is that you don’t have to monitor your stocks all the time. You will not lose more than you accepted to lose. You will not forget to sell, when stocks are going down.
When setting a stop loss, you must be aware that sometimes dynamic price fluctuations may occur and they can trigger your order. It is good practice to set price level a little below desired level to avoid such situations.
Where to set a stop loss?
There are different opinions and strategies. You can have your own loss level you accept and you always place stop loss based on this.
It is a very good idea to set a stop loss slightly below support levels (half of white marubozu body, certain SMA or EMA, trend channel border…). Very often, breaking out the support level indicates further movements in breakout direction, therefore it is a good place to close (open) the position.
These orders are especially useful for people who can’t dedicate whole day to watch the market. Then use stop losses and remember to set properly the period of time when your stop-loss orders are active.
