When you invest or trade, one of the hardest parts is managing risk. No one wants to see a small loss turn into a big one. That’s where a stop loss order comes in.
What is a Stop Loss Order?
A stop loss order is an instruction you give your broker to automatically sell a stock (or any asset) once it hits a certain price. The goal is simple: limit your losses if the trade moves against you.
For example, if you buy a stock at $50 and set a stop loss at $45, your broker will sell it if the price drops to $45. That way, you cap your loss at around 10%.
Why Use a Stop Loss?
Risk control: Helps you stick to a planned level of loss instead of making emotional decisions.
Peace of mind: You don’t have to watch the market every second.
Discipline: Encourages a structured approach rather than chasing prices.
Types of Stop Loss Orders
1. Fixed stop loss: You set it at a specific price and leave it there.
2. Trailing stop loss: Moves with the market price. For example, if the stock rises from $50 to $60 and you set a $5 trailing stop, the stop loss will rise to $55. If the stock falls back, it triggers at $55, locking in gains.
3. Percentage stop loss: Based on a chosen percentage drop from the entry price.
Things to Keep in Mind
Stop losses aren’t guaranteed. In fast-moving markets, prices can skip past your stop price, leading to a bigger loss than planned.
Setting it too tight may cause you to exit on normal market fluctuations. Too wide, and you risk larger losses.
Think about your risk tolerance, the asset’s volatility, and your overall strategy before deciding where to place it.
Bottom Line
Stop loss orders are not about predicting the market. They’re about protecting your money when things don’t go as planned. Whether you’re a short-term trader or a long-term investor, having a stop loss strategy is one of the simplest ways to bring discipline and peace of mind to your investing.
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