Day trading can be very complex and risky. There are plenty of pitfalls that can get the best of inexperienced traders, but there are also a lot of tools we have at our disposal as day traders to help us overcome the risks involved. One of the most important tools at our disposal is a stop loss order.
A stop loss order is an order placed with a broker to buy or sell once a stock reaches a predefined price. The stop loss is intended to limit the loss an investor will experience in a security position. There is a myriad of advantages to using stop loss rules when they are used correctly, and every hopeful trader should take the time to acquaint themselves with the idea.
Stop loss orders are perfect for making sure you don’t incur huge losses when you cannot monitor your stocks. If you are on vacation, or otherwise unable to monitor your investments for a certain period, stop losses can be the perfect way to make sure you don’t lose your investment. There are a number of stop loss strategies for a wide variety of trading strategies and styles, and no singular strategy is the “correct” one.
For day trading, the stop loss order has a few practical applications, such as trailing stop losses or personal daily stop losses. Trailing stop losses allow losses to be minimized, and profits “locked in” as the price changes in the stock’s favor. Personal daily stop losses, while not true stop loss orders, are important for defining a point at which you should call it quits, so to speak.
Examples of Stop Loss Strategies
Like we said before, there are a number of strategies that traders can use to employ stop loss orders. For day trading, the strategies and practical applications of the stop loss order are a bit different from other styles of trading. We’ll go over a few common stop loss strategies for day trading here, in order to give you an idea of how the stop loss can be used in effective day trading.
The first strategy, which we mentioned above, is the trailing stop loss. A trailing stop loss is an order which can be set at a specific percentage or dollar amount away from a security’s current market price. Setting the trailing stop loss below the current market price for a stock will cause the stop price to rise when the stock price rises, but it will stay the same when it falls.
This allows traders to limit their losses on a particular stock without also limiting their gains. This gives the trader a more flexible option compared to a static stop loss order, but it can be difficult to choose how far to trail your stop order. One variation on the trailing stop loss is the indicator stop.
An indicator stop is a trailing stop loss strategy that is based on some sort of market indicator to determine pricing and stop levels. The idea is that you want to be shown some signs of weakness before you exit, making sure you avoid premature exits. This can be an effective way to not miss out on good trends when you misidentify them, but it can also come with more risk than a simple trailing stop.
Day trading is always a game of numbers and probability, so it is best to do lots of research on stop losses to determine what is the best strategy for your own trading style and preferred stocks.
So, How Do Stop Loss Rules Protect Day Traders?
Stop loss is one of those things that gives you control over how much you lose. In the world of day trading, it is essential to use all of these tools to the best of your ability in order to limit losses and maximize profits. Stop losses in their various forms are one of the simplest and most common tools that day traders have at their disposal.
Learning to use stop loss orders and strategies properly can give you a lot of control over your investments. Especially in the case of personal stop losses where we simply decide that we have lost enough for today. Being stubborn about an investment is one of the easiest ways to maximize loss.