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This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 9 references cited in this article that you can view at the bottom of the page.
This article has been viewed 11,141 times.
Trailing Stop Loss is a commonly used order in securities. This order allows you to sell your investment when its price falls below a certain level. Stop loss orders can help you make selling decisions easier, more rational, and less dependent on emotions. This is an order designed for investors who want to minimize risk, helping to minimize losses while maximizing potential gains. [1] X Research Source Stop-loss orders are automatic, so you don’t need to constantly check the stock price.
Steps
Understanding Stop Loss Orders
- You buy the stock for $25.
- The stock rose to $27.
- You place a lower stop loss with a move value of 1 USD.
- While the price moves up, the stop loss will automatically move 1 USD lower than the current price.
- When the stock price reached $29 and then started to fall. Then the stop loss is 28 USD.
- After the stock price hits $28, the trailing stop loss order will take effect. That is, you will sell the stock. At this point, your profit is preserved (assuming there are buyers).
- Traditional stop loss orders are placed at a specific price point and cannot be changed. For example:
- You buy stock for $30.
- You place a traditional stop loss at 28 USD. In this case, the stock will sell for $28.
- If the stock price goes up to $35 and then suddenly plummets, you’d still sell at $28. You won’t keep the gains made during the stock’s recent rally.
- For example, if you have $15 worth of stock. You set the sell level at 10 USD, with the traditional stop loss, this automatic stop loss point remains unchanged. If your stock price goes up to $20, your stop loss is still $10. If the stock price drops, you will still sell for $10.
- But with a stop loss order below will be different, for example you also have a stock priced at 15 USD. You can place a stop loss below 10% instead of placing a traditional stop loss at $13.50. If the stock price goes up to $20, you’ll still use 10%. So your sell order will take effect when this stock falls to 18 USD (10% lower than the 20 USD threshold). If you use a traditional stop loss, you should always sell the stock when it drops to $13.50, and you lose the profit you made when the stock goes up.
Place a stop loss below
- You better have the option to use this command.
- For example, you can define a move value (trail) as a certain value (e.g. 10 USD) or a percentage of the value of a security (e.g. 5%). In both cases, this range of movement is related to the stock value. This score will automatically change over time as the stock price changes.
- Using a dollar-denominated option, you limit a certain dollar amount to allow your stock to drop from its peak before the sell order is automatically triggered. This value cannot have more than two decimal places (i.e. no more than two digits after the “,” in the decimal system.) [6] X Research Source
- Using the percentage option, you can determine the appropriate range for the stock to move up and down during an uptrend. This ratio should be in the range of 1% to 30% of the current price. [7] X Research Sources
- Be aware of the risks. The risk in any stop loss order is that the stock could fall below the sell point and trigger selling. The stock can then reverse and go up again, so you lose out on the stock’s new advance.
- If you set the value too narrowly, you can trigger an early sale.
- If the value is too broad, you may miss the opportunity to make a lot of profit when the stock starts to fall.
- An order valid for the day is an order valid until the end of the current trading session. If you place an order valid for the day when the market closes, it will remain valid until the next session’s closing time. [9] X Research Source
- Most GTC orders are valid for 120 days. As such, this order will be canceled after 120 days. However, there are still some orders that allow an indefinite extension of GTC orders.
- Once you reach the sell point where you have activated your trailing stop loss, you can then complete a market or limit order. This means that you will sell your stock.
Advice
- A trailing stop loss order can also be used for positions and options to sell stocks.
Warning
- For stocks with strong volatility, a traditional stop-loss order should be chosen. [11] X Research Source
This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 9 references cited in this article that you can view at the bottom of the page.
This article has been viewed 11,141 times.
Trailing Stop Loss is a commonly used order in securities. This order allows you to sell your investment when its price falls below a certain level. Stop loss orders can help you make selling decisions easier, more rational, and less dependent on emotions. This is an order designed for investors who want to minimize risk, helping to minimize losses while maximizing potential gains. [1] X Research Source Stop-loss orders are automatic, so you don’t need to constantly check the stock price.
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