A stop loss is basically like an insurance policy. It protects you should one of your trades go bad. With a stop loss your position will automatically be sold when the stop reaches a certain point. Using stop losses is a great way to manage your risks. Here are 10 tips that will help you get the most out of using stop loss orders.
Tip #1 – Never Use A Stop Loss To Purchase A Large Amount Of Shares
While stop losses can help you manage your risks, there are simply some situations where they should be avoided. One of those situations is when you are buying a large block of shares. When a large block of shares is purchased it can be very hard to fill that order in a short period of time. As a result the trade can become ineffective.
Tip #2 – Never Use A Stop Loss During Active Trading
If you are the type of trader who sites at the computer and watches trades all day, than there no need to use stop loss orders. It serves little purpose since you are right there watching everything that is going on.
Tip #3 – Watch Out For Those Hidden Fees
Every stock broker is different and will therefore charge different rates. Look for a broker that uses a flat fee structure as this is the best way to go.
Tip #4 – Never Assume Anything
You should always check your stop loss order to make sure it has been filled. Never assume this has been done. Check all trade confirmations to ensure the stop loss order has indeed been filled in its entirety.
Tip #5 – New Investors Should Always Use Stop Loss Orders
If you are new to the world of investing it is a good idea to use stop loss orders. Doing so will help make trading stocks a lot easier. One of the biggest problems new traders have is letting their emotions rule them. With a stop loss order the emotional aspect is eliminated which will help you make better trading decisions.
Tip #6 – Set Up Profits vs Loss Ratios With Stop Loss Orders
Always knowing your profits vs loss ratios is extremely important if you want to be a successful trader. Stop loss orders can help you keep everything in order so you know exactly what you have at all times.
Tip #7 – Watch Out For Trading Gaps During After Hours
When the stock market closes there can be stock price gaps that occur. When this happens it can cause the stock to keep trading right through your stop loss order. And as you can imagine, this can cause serious problems for investors.
Tip #8 – Set The Trigger Price Using Common Price Increments
When using stop loss orders it is very important that you set a good trigger price. This is by far one of the most important steps in this process. Its always a good idea to use common price increments such as $30.00 or $75.50. Stay away from increments such as $21.24 or $30.21.
Tip #9 – Pay Attention To The Liquidity Of The Stock
The liquidity of a stock ensures that the trigger price is reached. Use stop losses with stocks that have a high average daily volume. Stocks with a high average daily volume, 100,000 shares or more, decrease the chances that the order will be traded through.
Tip #10 – Give Your Stocks At Least 5% Of Space
If the stock you purchases is trading at $200, your stop loss should be $195 or lower. That way intraday price swings won't cause the order to trigger before it is suppose to.
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