A stop order is placed with your broker, and executed to sell or exit a trade when your determined price level is reached. If you bought Apple stock at $300 a share, you would want to place a “stop loss order” around $290 to prevent further losses. So, if Apple’s stock price were to drop down to $290, your broker would automatically execute the “stop loss order” and sell your shares of stock, thus preventing preventing you from losing money. When a market moves fast, you don’t want to be rushing to a computer terminal to execute a trade to sell. It may be too late by then.
Other Types of Orders:
Where To Place A Stop Loss Order
The placement of a stop loss order must be precise. It MUST be implemented by using technical analysis. Many novice traders, simply say that they will not take more than a 10% loss, and set the stop 10% below their purchase price. While this may work to prevent losses, it is NOT the optimal way to use a stop. Novice traders don’t calculate volatility, price levels, and moving averages, and find themselves getting “stopped out” prematurely only to see the stock price rise after they have sold out their position.
Below are some examples of where to place your stop loss:
A stop loss order can be placed at a support/resistance level.
Place a stop loss order just under a moving average. I typically use a 10 day exponential moving average. Be sure to give “room for play”. Do not place the stop at the moving average line. It must be place below. Moving averages are dynamic and change as time progresses. Keep in mind also that many traders place their stops in the same place so, market makers may manipulate price action to activate the stops. I like to use about 3 points difference from the moving average. In highly choppy stocks, I might use 4-5 points distance.
Use a volatility stop. This is a 21 day volatility stop. Much like the moving average you will place the stop just below the red volatility line. You don’t need as much room, as a moving average stop. I sometimes place the stop exactly at the stop line. Volatility is calculated into this indicator and is quite dependable.
Moving Averages & Volatility Stop Indicators are common with most charting and brokerage services. You may want to use a combination of support level stops, and/or Moving average stop. It all depends on the situation, and how the stock has behaved during past breakouts.