One of the basic tenets of stock trading is to preserve your trading capital by limiting the size of losses on your losing trades. Not every trade is a winner, and even a small number of big losses can make it difficult to offset those losses with winning trades. A practice of setting a stop-loss on each trade will ensure your losses are manageable and do not put your trading account in a big hole.
Develop a strategy for deciding where to set your stop-loss prices on your stock trades. You likely have your own strategy for determining when and where to enter stock trades, and those same indicators should give you clues on where to place a stop-loss order. The stop-loss will be a stock price at which you would know your strategy and indicators did not work for that particular trade.Step 2
Enter a stop or stop-loss order using the stock trading screen of your brokerage account. "Stop" or "stop-loss" will be one of the available order types. You must include the stock symbol and number of shares in your open order and your selected stop price. For stock shares you have purchased, the stop-loss price must be below the current stock price. If you sold shares short, the stop price will be above the current share price.Step 3
Adjust your stop-loss price if your trade was a good one and you start making money. On a profitable trade, the stop-loss will become a number to lock in a profit as you track the stop price along with the stock price.
- If the stock price hits the stop-loss price, the stop order becomes a market order and will be filled at the best available bid or ask price, depending on whether the order is a sell or buy.
- If you make a lot of trades, trading software more advanced than the basic broker online trading screens might help you automate the setting of stop orders and tracking stop prices. For example, the trading software might allow you to open an order and set the stop order at the same time.
- Once a stop price is set, never reset a stop price to allow a bigger loss in the hope of the trade turning around and becoming profitable. Use the trades that are stopped out for losses as learning experiences so you'll better know where to set stop-loss prices in the future.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.