Stop Loss Order

Stop loss orders have a variety of important benefits and a few negatives. On the plus side some of the benefits of the stop loss order are as follows:

1. A decision regarding initial exit (in the event the trader is wrong on direction) can be made before the trade is ever entered and the stop placed at that level thus significantly lessening the likelihood of making an undisciplined emotional exit;

2. A stop can get the trader out of a trade that is going the wrong way even if the trader is not watching the market;

3. The placement of a stop can provide a disciplined way to cut losses;

4. The placement and subsequent movement of a stop can help prevent taking profits prematurely;

5. Trailing stops can be set so that as profit is gained, the stop automatically moves with the gain thus capturing more and more profit as a position moves favorable;

6. Stops are an indication of disciplined trading;

7. Stops cost nothing to place or change; there is only a commission when an order is filled.

On the minus side, there are at least a couple of problems, the most significant of which I think are the two that follow:

1. It can be difficult to determine the optimum price at which to place a stop and sometimes the trader can get whipsawed out of a position;

2. Stops do not afford perfect protection.

Keeping those things in mind, it is my opinion that most traders are far better off setting stops than not.