Stop Loss Order
Stop Loss Order is the limit a trader sets to minimize their losses on a position. Traders use Stop Loss as it automatically closes a position once the price falls to the one set by the trader.
Linked Limit and Stop Orders
The two main order types linked to open positions or pending orders are Stop Loss and Take Profit.
- Stop Loss order limits possible losses. It is set at a price lower than the opening price of the position or of the pending order execution.
- Take Profit order secures gains already acquired. It is set at a price higher than the opening price of the position or of the pending order execution.
When the security’s market price reaches the set limit for Stop Loss order / Take Profit order, the position closes automatically.
The set stop loss and take profit orders are removed automatically when the position is closed or when the pending order is cancelled.
Determining Stop Loss Order
A Stop Loss must be placed at a logical level where there is enough space for price fluctuation. It is all about the space of allowable risk threshold. The Stop Loss must be set at the level where the market is given enough room to move in your favor and enough room to close your trade if the price moves against you.
To determine the placement of a stop loss, traders practice many methods in line with their own trading strategy. The most commonly-used of these methods are discussed below:
- Percentage Method – determine the percentage of the stock you are willing to risk before you exit the trade.
- Support Method – determine the security’s most recent level of support and place your stop loss just below it.
- Moving Average Method – apply a moving average to your stock chart and place your stop loss below it.
The bottom line is that traders must evaluate their allowable risk to determine a stop loss on a trade. Learn about the price movement of the security you trade so you can use it as a guide to determine the placement of your stop loss.