How to Do a Stock Stop Loss Order

One of the most effective ways of protecting a winning stock position from a sudden drop in price (and loss in profit) is by placing a stop loss order.Basically a stop loss order tells your broker that if your stock drops in price a certain amount that the stock is to be automatically sold, protecting at least some of your profit.

Things You'll Need

• Stock trading account

Instructions

How to Do a Stock Loss Order

1. Find a stock you own which is currently in profit.

2. Determine how much of that profit you are willing to give up should the stock suddenly begin trading down and how much of that profit you wish to protect.

3. Contact your broker and instruct him or her to place a stop loss order at the point where you have determined your minimum profit is. In other words, tell your broker that you want your stock sold automatically if the price drops to your pre-determined minimum profit level.

4. Protect your profit even further by placing what is called a Trailing Stop on your stock. This is a stop loss that follows your stock as it continues trading higher so that you protect a greater profit each time your stock trades higher. A trailing stop that is set 5 points below the current price of your stock will continue following your stock as it trades higher, but should your stock trade lower by 5 points at any time, your stock will automatically be sold, protecting your profit.

5. Monitor the progress of your stock and adjust the position of your stop loss order as market conditions dictate. For additional detailed information on stop loss orders please see the Additional Resources link below.

Tips & Warnings

• Setting the position of a stop loss order is as much an art as it is a science. Set it too close and your stock will be sold on a normal small pull-back in price and you could lose out on future profits. Set your stop too loose and you will give up more profit than necessary if the market should drop. Consider the position of your stop loss carefully and don't be afraid to change it if market conditions dictate.

• Be aware that in a fast-moving market, especially if there is a down-gap in prices, your stop loss order may not protect your profits at all, and if you have purchased stock on margin a stop loss order will not prevent a margin call if the market gaps down past your stop loss point.

• There may be restrictions on using a stop loss order on certain types of securities; check with your broker ahead of time for limitations.

Resources

• Additional detailed information about how and when to use a stop loss