Stop Loss Order - Maximise Profits From Limiting Losses

Stop loss is critical to a serious stock trader. Sometimes, a share will reverse and go on to new highs after you have sold because the price hit or fell below your stop loss level.

Experienced stock traders recognize this to be a cost of trading. But if you are beginner, however, will count this as lost profits and begin to doubt the usefulness of stops.

You might forget that your first concern should be the protection of his capital, which then later discard the practice.

You may find it difficult to set stop-loss levels anyway, and you struggle with the concept of risk and ruin. Over time, you may realizes the error of your way. Normally this will be after your trading equity has been severely eroded.

Some traders experience difficulty in consistently applying mental stops. It requires discipline to place a stop-loss order, and stick to it when it is hit. However, this is a practice that must be developed and adhered to without exception. Stops are an indispensable part of risk and trade management.

When should you set a stop?

Your first stop should be set before you enter a trade. This is used to limit your initial risk. At this time, you should set both a dollar stop and a time stop. The longer you are in the market, the riskier your trade becomes.

So where do you place your stop?

There may come a time when the reason for taking a trade is proved wrong. This is the time to remove yourself from the position. You can use a mechanical method to make your job easier.

• Dollar stops
  Decide on the maximum amount you are prepared to risk on a trade.
• Break-even stops
  As the name suggest, stop when you can even break-even with your trade.
• Trailing stops
  As your trade progresses, it is necessary to move your stop levels upwards so as to lock in profits if the price reverses.
• Pivot point stops
  Stops at the turning point or the peak at each movement.
• Profit stops
  Simply exit the market when the price target is reached.
• Time and inactivity stops
  Set a time limit for staying in a trade that does not move as anticipated.

However, if your intention is for long term stock investing, this might not be applicable at all. Reason being, long term stock investment able to neglect the short term price fluctuations as your philisophy is invest in the business, not the trend. That is why, long term stock investment is the way to go if you are just about to begin.

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