How to Set Up a Stop Loss Order When Trading: An Expert's Guide

When trading, setting up a stop loss order is an important step to take in order to limit risk and protect profits. To do this, you'll need to go to the section of your online brokerage account where you can place a trade. Instead of choosing a market order, choose a stop loss order. Enter or scroll down to the price at which you would like to place a stop loss order.

Traders place stop-loss orders to limit risk or to protect a portion of the existing profits in a trading position. Placing a stop-loss order is normally offered as an option through a trading platform each time a trade is placed, and can be modified at any time. A stop-loss order effectively activates a market order once a price threshold is triggered. Placing a stop-loss order is the same as placing any other type of order.

You'll start by selecting buy or sell. There will be slight variations between different brokers, but it is possible that at this time your order will appear by default as a type of market order. Look for where it says Market and change it to Stop. Then, you just have to choose your final price and place the order. Customers have the ability to place maximum limit orders with multi-tranche option differentials on the desktop platform. Just fill in the option differential with which you want to place a trade and then change the type of order that appears at the bottom right of the order ticket to “Stop Limit”.

When the price of an asset reaches your loss limit price, your broker automatically sends a limit order to close the position at the loss limit price or at a better price. The price of a buy and stop order is fixed above the current market price, while in a sell and stop order, the price is fixed below the current market price. Investors can use a buy stop order to protect themselves from losses on short positions, or they can also use a buy stop order to try to take advantage of the bullish momentum. If at the opening of the market a gap occurs below a trader's stop-loss order, the order will be executed close to the opening price, even if that price is well below the specified stop-loss level. In its most commonly used application, a stop order offers investors a way to limit losses on a given position, and it is only triggered when the value reaches a designated limit price. Investors don't want to set their loss limit levels too far and lose too much money if the stock moves in the wrong direction.

On the other hand, investors don't want to set their loss limit levels too close and lose money if they are removed from trading too soon. As in the previous example, where the support method is used, you should set your loss limit just below the moving average so that the stock has some wiggle room. Stop-loss orders are a fundamental money management tool for traders, but they don't offer an absolute guarantee against losses. Once you have inserted the moving average, all you have to do is set your loss limit just below the moving average level. The ideal place for a stop-loss allows for some fluctuation, but it allows you to exit your position if the price turns against you. The moving average method for setting loss limits is simpler than the support method, but it also allows the loss limit to be adapted to each stock.

You want to leave the market that same fluctuation margin and, at the same time, protect yourself from losses. Unlike the stop-loss market order, which closes the trade at any price, the stop-loss limit order closes it only at the stop-loss price or at a better price. The support method for setting loss limits is a bit more difficult to implement than the percentage method, but it also allows you to adapt your loss limit level to the stock you're trading in.