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Where to Set Your Stop-Loss
KEY TIPS
A stop-loss order is placed with a broker to sell securities when they reach a specific price.
Finding out where to place your stop loss depends on your risk threshold; the price should minimize and limit your loss.
The percentage method limits the stop loss to a specific percentage.
In the support method, an investor determines the most recent support level for the stock and places the stop loss just below that level.
The moving average method considers the stop loss to be placed just below a longer-term moving average price.
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Nobody wants to lose money when they play the market. That is why it is important to establish a floor for your position in a security. That's where stop-loss orders come in. But many investors have a hard time determining where to set their levels. Setting them too far can result in big losses if the market moves in the opposite direction. Set stop loss too close and you can exit a position too quickly.
So how can you know where to set your stop loss order? Keep reading to know more.
What is a stop loss order?
A stop-loss order is placed with a broker to sell securities when they reach a specified price.1 These orders help minimize the loss that an investor may incur on a securities position. Therefore, if you set the stop loss order 10% below the price at which you bought the security, your loss will be limited to 10%.
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For example, if you buy shares of Company X for $ 25 per share, you can enter a stop-loss order for $ 22.50. This will keep your loss at 10%. But if Company X's shares fall below $ 22.50, its shares will be sold at the current price.
Slippage refers to the point where you cannot find a buyer at your limit and end up with a lower price than expected.
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Determination of the stop loss order
Determining the placement of stop-loss orders is all about targeting an allowable risk threshold. This price must be derived strategically with the intention of limiting the loss. For example, if a stock is bought at $ 30 and the stop-loss is placed at $ 24, the stop-loss is limiting the downside catch to 20% of the original position. If the 20% threshold is where you feel comfortable, place a trailing stop loss.
Know where you will place your stop before you start trading a specific value.
There are many theories about stop loss placement. Technical traders are always looking for ways to time the market, and different stop or limit orders have different uses depending on the type of timing techniques that are implemented. Some theories use universal placements, such as a 6% trailing stop on all values, and some theories use pattern or safety specific placements, including average true range percentage stops.
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Stop Loss placement methods
Common methods include the percentage method described above. There is also the support method that involves sharp stops at a fixed price. This method can be a bit more difficult to practice. You will need to find out the latest level of support for the stock. As soon as you have discovered it, you can place your stop loss order just below that level.
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The other method is the moving average method. Using this form, stop losses are placed just below a long-term moving average price rather than short-term prices.
Swing traders often employ a multi-day high / low method, in which stops are placed at the low price of a predetermined trading day. For example, lows can be constantly relocated to the two-day low. More patient traders can use indicator stops based on a broader trend analysis. Indicator stops are often combined with other technical indicators, such as the Relative Strength Index (RSI).
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What to consider with Stop Loss orders
As an investor, there are a few things to keep in mind when it comes to stop-loss orders:
Stop loss orders are not for active traders.
Stop-loss orders don't work well for large blocks of stocks, as you can lose more in the long run.
Brokers charge different fees for different orders, so keep an eye on how much you are paying.
And never assume that your stop-loss order has been executed. Always wait for the order confirmation.
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