Once you have an active investment portfolio of Stocks and ETFs, placing stop losses can be very useful. Actually for the most part I would not know how to live without them.
I decided to write this post after speaking to a CCTrader user who has been using the platform since 2011 and was still under the impression that Stop Losses can only be set to protect losses. 😲 Whilst I can understand the line of reasoning it highlights the importance of creating content to explain it.
📘 A stop loss order, also referred to as a stop–loss order is an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
Stop Losses can be used for two main reasons.
- To protect profits
- To buy something at a specific price if something surges
To protect profits
The most common way that a stop loss is used is the first. Ie. When someone is making a profit and wants to protect it. Lets take a look at the screenshot below.
Apple is trading at 136.67 and the average weighted purchase price is 125.50. Therefore my breakeven price is 125.50. It is not necessarily the price I bought it at as I could have bought multiple times. The system very conveniently calculates my average price taking into consideration also how much I bought at each price (which is why it is called “weighted” price)
I place an order SELL Stop Loss 130.00 so that if the price reaches 130.00 the system will sell automatically at the market price.
This is very convenient if you wish to ensure you are protected especially if you are a busy person, you happen to be travelling or generally simply cannot watch the markets every day.
💡 Tips for using SELL stop losses.
➡️ If you believe in a stock for the long term and the market price is too close do not use a stop loss since some market volatility will trigger an unwanted sell. In such case it is not the end of the world simply buy it again.
➡️ For illiquid stocks that are highly volatile a stop loss might sell at a price lower than you set. This is not a common occurrence however if a stock is falling extremely fast it might execute at a price below what you set it at.
➡️ Avoid using Stop losses on very small stocks like OTC, OTCBB and Pink Sheets (penny stocks) with low volume.
To buy something at a specific price if something surges
Stop losses can be used the other way around. For instance I might want to buy a particular instrument if it surges. In this case all one needs to do is to apply the reverse logic.
Buy, Stop Loss, set the price you wish to buy if the price is reached.
Personally I have never used it but it can prove to be useful for those using technical analysis.
I hope this post is useful, leave any feedback and suggestions in the comments below.