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How does a stop loss order work
Is it as simple as saying Stop! and that's it? lol
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 where a stockholder/trader will not hold past due to greater chances of further downside. This protects the trader/stockholder from bigger potential losses.
How does a stop loss order work? 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 potential support. And upon entering they might place a hard stop in their trading software. This hard stop could be placed at $99, this means for as long as the stock holds over $99 the trader will continue to hold this position. Looking for the sell targets during a day trade or swing trade. If the stock price ever hits $99 the system will automatically put the stop order. Which should trigger and sell the position. This was the trader’s line in the sand. Sometimes called, downside risk as to the stock breaks under 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 point that will trigger the order to go live. Which will set a limit price you want it filled at.
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. This is great because you will be filled at the best market value after the trigger.
The downside is that 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.
So, how does a stop loss order work and are they really that important? Stop losses are one of the most overlooked tools for new traders and are often the main reason for blown-up accounts. Failure from the new traders because they lack the correct education needed to learn about the proper tools. And worse, not having a trading plan in place. This is why day trading education is essential from the very first day one decides to become a trader.
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