Stop Loss Orders and Trailing Stop Loss Orders are valuable tools you can utilize to maximize your ROI (Return on Investment). Playing the stock market is fraught with risks; however, “no risk, no reward” (quote attributed to Christy Raedeke, The Daykeeper’s Grimoire) plan of attack must be remembered. Trading with volatile stocks can be hazardous and are, therefore, at times more difficult to “stop.” Discover why.
Using Stop Loss Orders Correctly
Stop Loss Orders are a great strategy for your financial investments if you use them correctly. When placing a Stop Loss Order, it’s like making any other purchase or trade. For a “short position” stop loss, you will place a
“buy stop loss order” and for “long positions,” you will place a “sell stop loss order.” A short position is when you borrow stock from a broker for a short period of time. A long position is called such when you purchase a stock with the expectation that it will rise in value over a long period of time (patience is called for here). You buy a long position when you expect to have the stock for a long time, while a short position is just holding the stock for a shorter period of time, expecting (and hoping) to sell it in a short period of time to earn money that way.
You Might Not Want To Use Stop Loss Orders When …
Stocks with a lot of volatility and stop loss orders don’t usually mix well. If you consider the very nature of volatile stocks, you know they tend to swing widely between high prices and low prices. The wild swings make timing when and where your place your stop loss orders extremely difficult to gauge. If you try to use Stop Loss Orders with volatile stocks, be prepared to accept the fact that your risks may be much greater and your losses much more.
Another detrimental effect that can be attributed to Stop Loss Orders is the actions of the so-called “market maker.” A market maker is a trader who has experience and is knowledgeable about how to manipulate the market system. If a market maker notices a lot of Stop Loss Orders on a particular stock, he/she can use this knowledge to their advantage and bid the price of a stock, which will trigger an effect that might push the stock in the opposite direction than the one you want it to go in. Traders, especially those new to how stock deals work, can be targeted to sell orders that are large enough in scope to get a big buy from another investor, thereby increasing their own profit margin. Market makers are the ones who “bid” the price of the stock; in essence, they “make the market.” While what they do is legal, often they can manage to swing the trading for their own agenda.
Stop Loss Orders can be a method of protecting yourself from runaway losses. Ensure you are using them properly. Let StopLossTracker help you navigate the system.