Stop-Loss Order

A Stop-Loss Order automatically sells (or buys to cover) a security when it reaches a specified price, helping investors limit potential losses or protect profits.

How Stop-Loss Orders Work:

1. You own stock at $50, want to limit loss to 10%
2. Set stop-loss at $45
3. If price drops to $45, order triggers
4. Becomes a market order and sells

Types of Stop Orders:

Type	Triggers	Executes As
Stop-Loss	At stop price	Market order
Stop-Limit	At stop price	Limit order
Trailing Stop	% or $ from high	Market order

Example - Trailing Stop:

• Buy stock at $100
• Set 10% trailing stop
• Stock rises to $120 → Stop adjusts to $108
• Stock drops to $108 → Triggers sell

Setting Stop-Loss Levels:

• Percentage-Based: 5-10% below purchase price
• Support-Based: Just below key support levels
• Volatility-Based: Based on ATR (Average True Range)
• Moving Average: Below 50-day or 200-day MA

Advantages:

• Automatic risk management
• Removes emotional decision-making
• Protects profits on winning positions
• Limits maximum loss

Disadvantages:

• Can be triggered by temporary dips (whipsaws)
• Stop-loss becomes market order (slippage risk)
• Doesn't protect against gap downs
• May lock in losses during volatility

Best Practices:

1. Don't set stops at obvious round numbers
2. Give stops enough room to avoid whipsaws
3. Consider using stop-limit orders in illiquid stocks
4. Adjust stops as position becomes profitable