Knowing When to Stop: 3 Simple Protective Strategies

Of the utmost concern to any trader is protecting against loss. Your trading toolbox should include strategies that protect you whether selling or buying. Today, we’ll focus on stop-loss methods, basic tools that help you stop the inevitable losses before they are unmanageable.

To begin with, the sell stop order is a basic strategy to implement. Also known as a stop-loss order, it does exactly what it sounds like: stops loss when stock value declines. You set a stop price–typically in the range of 5 percent to15 percent below purchase price. If the stock reaches it, then an order to sell is issued.

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While you can definitely limit losses with this tool, be aware that the method isn’t precise, and there is always the chance that downward motion could be followed by an upward climb. Regardless of any rebound, your sell order still goes through.

Given day-to-day price adjustments, and knowing that the sell price isn’t necessarily going to be what was set as the stop price, you may prefer the control afforded by the stop-limit order instead: Stop-limit orders require that the stop price be firmly in place before execution. Rebounds, or even extreme drops, won’t trigger it.

Finally, utilizing the trailing stop approach could offer still more control and flexibility. It’s the same basic idea, an order to sell the stock when it hits a certain price.  However, the price isn’t set in stone. Instead, it changes a set amount or percentage under the fluctuating value.

Each approach has its strengths and appropriate applications, and Tradespoon helps you out by providing sell stop recommendations for stocks, options, and options spread. Click here for a brief overview of how Tradespoon works (and see how we pull out the stops for you!).

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