|
|
What Is A Stop-Loss Order? Why Should I Care? |
By:
Darren McLaughlin |
|
|
A stop-loss order is the trader's best friend. The reason for
this is simple: the stop-loss order can help the savvy investor
avoid losses, and protect gains. With something of this great of
value, you'd be almost sure that everyone would already know
about it and use it. This is not the case. Many neophyte
investors seems to either not know or not care about protecting
their downside.
How does a stop loss work?
A stop-loss order is generally a limit order that executes at a
given price. If you have a stock you bought at $18, and it's not
at $24, you've made a hefty profit and can use a stop loss to
protect your profit. If you set your stop-loss order to $23, if
the stock falls by a dollar, the trade will automatically
execute, and you'll be sitting comfortably on the sidelines, in
the green. The beauty of the stop-loss is that it's automatic.
You don't need to fret whether to make the trade, and you don't
have to be sitting next to your terminal waiting to hit the
"SELL" button. Stop-loss orders can be setup as "Good Til
Cancelled", so you can basically "set it and forget it".
Can a stop-loss order hurt you?
Many new investors are frightened to use a stop-loss order for
fear the trade will execute on temporary news, and the trade
will be closed. This is a real possibility, and for this reason
you need to be careful when setting the amount that triggers the
order. Many people use a 8% stop, but this might be too tight
for many volatile issues. But a 15% margin should give you
plenty of wiggle room. If a stock loses 15% of its' value in one
trading session, you'll be very happy you're in cash soon enough.
Trailing stop-losses protect your gains.
If you are already in the green, you can use a trailing stop
loss to protect your gains. A trailing stop-loss is set to
automatically trail the share price by a certain amount. If it's
15% and the stock is at $100, the stop-loss will execute at $85.
If the stock went to $200, the stop loss would be at $170. This
way you always protect yourself against a loss automatically, as
soon as the stock goes down in price.
The terminology for stop-loss orders changes from brokerage to
brokerage, so you'll have to check your console for the exact
order on setting one up. Generally it's a one-click process that
is quite easy. There may be a small fee, but generally there is
not. If you forego using stop-losses, you better at least be
prepared to be an extremely active trader who monitors your
investments constantly. Failure to do so for even a day can
result in huge losses. Take a look at the massive selloff in
companies like Taser or Google to see just how disastrously even
a great trade can get if you don't protect the downside.
|
|
Article Source: http://www.PopularArticles.com/article40378.html |
Article: What Is A Stop-Loss Order? Why Should I Care?
Author: Darren McLaughlin
Total Views: 26
Word Count: 453
Category:
Home /
Finance / Investing
|
|
|
|
|
|
Categories 
