What is a Stop Loss Order?
A Stop loss order is the most important thing every stock trader or share trader should know about. It is not jut knowing but also important to use it consistently for every trade that the stock trader makes. It is the only way to a fortune in the stock market.
A Stop loss order is the most important thing every stock trader or share trader should know about. It is not jut knowing but also important to use it consistently for every trade that the stock trader makes. It is the only way to a fortune in the stock market.
Introduction to Stop Loss Order
How often do you feel like stopping trading stocks or giving up trading altogether? If you are reading this article, it means very often you felt like that. But that also means that you cannot be stopped. Many stock traders stop trading altogether before they know how to use a stop loss order and how important it is for their share trading. But few persist in their quest for success in the stock market till they reach this point to know their most important weapon when trading stocks.
What is a Stop Loss Order?
A stop loss order is the order that is unlike the conventional market or limit order you placed in your initial trades. Do you know that there is another field in your order form when you place those stock buy or sell orders? That is the “stop loss” field.
When you specify a value for this field in terms of the price of the share, the order whether it be buy or sell becomes a stop loss order. If it is a buy order with a stop price specified, it is called stop loss buy order. For sell order, it is stop loss sell order.
How does Stop Loss Order Work?
A stop loss order works in this way: When the share price of the stock you are trading goes below the stop price that you specified in your stop loss sell order, the order gets triggered or becomes active. Till then it was just in a passive mode waiting to get triggered.
Once it is triggered the order will be executed based on the limit price or market price that you had selected when you placed the order. If the stock just passed below the stop price and is still above the limit price your stop loss order gets executed. In other words, in a stop loss sell order your limit price to sell the stock at a minimum price must be below the stop loss price which itself is below the current market price of the stock.
A stop loss buy order works in the opposite way. But your stop loss price will be above current market price and limit price will be above stop loss price. Thus it gets triggered when the stock price passes above the stop loss price.
Most of the times a stop loss order is used to protect from losses that can accumulate badly if allowed when stocks are falling. Hence a stop loss sell order is the most used one. Due to its ability to stop losses at a stop point, it is called as stop loss order. But its uses, advantages, disadvantages, and professional tactics have evolved over time to make it an important weapon as well as defense for a stock trader.
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