E-Business

Why You Should Use Stop Loss Orders

Stop loss orders are a great tool for investors when they’re trading in different kinds of Market News and Charts situations.  If you know how to use it properly, you can secure your trades from losses, since stop loss orders are generally treated as some sort of insurance for trading Charts and Analysis.

Stop Loss Orders

As we have mentioned, stop loss orders are considered to be insurance policies since they can save you from incurring some losses.  They will come to your rescue once a certain loss level is hit by your trade, preventing further losses from happening.

In general there are two types of stop orders, which are stop market orders and stop limit orders.  Stop market orders will sell the shares allotted at the market once it is activated. If, for instance, the stop price is $50 per share, a market order will be placed instantly to sell the desired position once that level is reached.

Stop limit orders, on the other hand, will automatically place a limit order when the trigger price is reached.  When you place a stop limit order, you will have to indicate what limit level you want. This comes with some additional risks, so this is more usually set up by experienced traders.  It offers more control over the final sell price of your position.

Reasons to Use Stop Loss Orders

There are several reasons why you use stop loss orders.  Here are some of them:

Automate Trading

Stop loss orders execute automatically once the pre-set levels have been reached.  This makes the nature of stop loss orders automatic, meaning you do not really have to be present when it’s triggered.

Simple

Setting a stop loss order is very much like a “set and forget” approach.  You don’t really have to suffer much complexity in the system as long as you are familiar with the things that kind of stop order does.  

Flexibility

Stop loss orders are not only simple; they’re also useful in many different conditions.  For advanced traders, the usage of stop limit orders, for instance, provides more options on how to maneuver a position if the stop level has already been reached.

Diminishes Emotion

It is a well-known fact that the more a trader becomes emotional, the more he or she is prone to committing hasty decisions.  And when a traders makes a lot of hasty decisions, he or she is also very susceptible to committing mistakes, which could translate to huge losses.

Stop loss orders make it easy for a trader to ignore his or her emotions, if not completely remove them.  You can lay back and watch what happens to the trade without worrying too much about your potential losses, since you have already put a cap on that when you determined the trigger level at which the order will be activated.  

Further, eliminating too much trading emotions also help you become a more disciplined market participant.  Discipline helps the trader learn more about the market as he goes on trading, and makes it easy for him or her to stay with the market for the longer haul.