What Is Stop Loss? Risk Management Strategies
What is a stop-loss order, how to use it and how to protect your portfolio from large losses?
A stop-loss order automatically sells a stock when its price drops to a predetermined level.
How Does Stop Loss Work?
If you buy a stock at $100 and set a stop loss at $90, the system triggers a sell order at $90, limiting your loss to 10%.
Types of Stop Loss:
Fixed Stop Loss: A specific price level is set.
Trailing Stop: The stop level moves up as the price increases.
Time-Based Stop: Position is closed if expected move does not occur.
Tips for Setting Stop Loss:
- Do not set too close; normal fluctuations may trigger it
- Place stops just below support levels
- Never risk more than 1-2% of your portfolio on a single trade
- Once set, avoid moving your stop loss lower
Most professional traders attribute success to managing losses effectively.
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