According to Stocktrader.com, stop orders work like insurance so that in case the trade goes sour for whatever reasons the investor will have his or her position automatically sold for a loss.
Using stop loss is the most effective way to manage risk. It’s like having a car or a house with a fire extinguisher. You can’t get completely burnt, if you use it.
To make the most of stop loss orders, apply some of these tips:
8 Tips to To Successfully Use Stop Orders
- Never use stop loss orders for active trading. For investors that watch their screens all day and are involved in day trading a stop loss order serves little purpose.
- Know your transaction fees. Trading platforms charge different rates for each transactions. If the market keeps catching your stop loss, go completely out of the market to avoid big losses due to transaction fees. A flat-fee structure is probably the best route to using stop loss orders.
- Never assume a stop loss order has been filled successfully. Always double check the trade confirmations page to confirm the order was filled in its entirety.
- Don’t use stop loss orders for large positions. For investors purchasing blocks of shares stop loss orders may hurt more than they help due to inefficient order filling.
- New investors should use only stop market orders. Stop market orders once triggered will simply sell at the current market price. Stop limit orders are advanced and are more prone to failure for filling in their entirety.
- Use stop loss orders to setup a profit vs loss ratio. Profits vs Loss ratios are a key tool for the highly successful investor and stop loss orders can help keep the discipline portion of the strategy intact.
- Set the trigger price at common price increments. Prices like $100 or $60.50 are far more common to be traded at than $123.47. By placing the trigger price at a common increment there is a smaller chance of the stock “trading through” the order trigger.
- Use with stocks that have high average daily volume. Liquidity is important to help ensure the trigger price is hit. If the average daily volume is less than 100,000 shares for example than there is a higher risk of the order to be “traded through”.
While stop loss orders can be easy to use, the above tips should help investors make the most of these order placements. Trade wisely.