How Stop-Loss Orders Work
A stop-loss order is an automated change order given through an investor to their
brokerage. This order executes as soon as the price of the stock falls to a pre-
determined price level the stockholder chose. These types of orders are typically
looked at as a line in the sand were a stockholder/trader will not hold past due to
greater chances of further downside. This protects the trader/stockholder from
bigger potential losses.
For example, imagine if you had 100 shares of BA stock that you bought at $105
per share. You expect to sell these shares at $115. They are trading within a
$100-$105 range. In this case most traders would expect this $100 level to hold
as a potential support zone and upon entering they might place a hard stop order
into their trading software. This hard stop could be placed a $99 this means for
as long as the stock holds over $99 the trader will continue to hold this position
looking for his or her sell targets during a day trade or swing trade session. If the
stock price ever hits $99 the system will automatically put the stop order live and
it should trigger and sell the position. This was the trades line in the sand or stop
loss limiting the trader & downside risk as the stock breaks under the support and
starts a downtrend.
How to place a Stop-Loss
There are two ways to place your stop-loss order one is via a stop-limit order and
the other is a stop market order. The wording may differ depending on your
broker but the way it works is the same. With a stop-limit order you will place a
price that will trigger the order to go live and set a limit price you want it filled at.
For example, trigger $99.50 with a limit of $99 this means if the price hits $99.50
your order will go live and will only fill at $99 or above. The danger with this is
that if it hits $99.50 and flashes quickly through $99 you might not be filled and
the stock could see a further downside with your order still sitting live not being
filled. This is when a stop market order wins because if you set the stop at $99
and it hits $99 you will be filled at the best available market price at the moment
the stop is triggered, this price could be $99 or $98 or $100 or $85! Slippage is a
possibility but at least you will be out of the trade right then and there.
Stop losses are one of the most overlooked tools for new day traders and are
oftentimes the main reason for blown up day trading accounts and failure of new
day traders because they lack the day trading education needed to learn about
the proper tools and trade planning a seasoned day trader would know about and
use. This is why day trading education is absolutely essential from the very first
day one decides to learn about being an active day trader.
Benefits of using a Stop-Loss
A stop-loss order is an automatic trade order to sell a given stock but only
at a pre-determined price level. Think of it as a line in the sand you will exit if
• A stop-loss order can limit losses on a position that goes against you.
• Most new traders do not bother to learn about stop losses through day
trading education and suffer blown up accounts because of it.
• A stop-loss is an essential part of any trading plan