Why Use Stop Orders

Stop orders are very critical in the stock market.  It can help you to limit your losses when you are wrong and keep your gains when you are right.  Many new investors will fail because they do not utilize this order.

So what is a stop order? Well a stop order is an order that you place whenever you are in a stock.  It tells your broker that if the stock gets to a certain point, sell my stock.  So why should you use it?

1.       Limit Your Losses

The most important part of trading is limiting your losses.  If you lose all of your money on 1 bad trade it doesn’t matter how good of a stock picker you are.  You need to have at least some money to make money from it.

Another great reason why limiting your losses is a good idea is because the less you lose when you are wrong the less often you will have to be right to make money in the market. 

So how do you use stop orders to limit your losses?  Well you simply place the order to sell the stock at a lower price.  For example if you buy a stock at $20 and you feel like it is a good buy unless it dips below a support level at $18 you could put a stop around $17 and that way if it does fall lower you will get out at $17 for a small loss instead of waiting for it to $!6 or $15 and beyond.

2.       Keep profits

Have you ever bought a stock watched it shoot up then watched it fall down and you lose all of your profit?  It happens.  Well a stop order can help you.

Now say you buy that same $20 stock but instead of going down it goes up to $35.  You may decide you do not want your stock to fall all the way down.  Instead you want to keep some of your profit.

So instead you put a stop at around $30.  Now if the stock falls you sell at $30 and keep the majority of your profit.  If it goes up you can still profit from the rising price of the stock.

For more on stop orders visit http://www.stocks-simplified.com/stop_order.html

For more orders visit http://www.stocks-simplified.com/stock_orders.html