Making use of Stop Loss Orders
A stop loss order is by far one of the most popular order types used by traders to manage risk. Many traders and investors use stop loss techniques to put a cap on the absolute risk. Using this risk management technique, traders can specify the level of loss at which a trade is automatically closed.
Most traders have heard of stop orders, and it's usually recommended that you use them frequently to prevent runaway losses if your trade does not go in the direction you anticipate. They are commonly called stop loss orders in this function. A stop loss order simply consists of an order to close a position that is set at a price below or higher than the prevailing market price. What you do is to enter a stop order to sell just under the current market price, if you're taking a long position. If the price doesn't go up but instead goes down, when it hits the level you set in the stop order, the order becomes a market order to sell. Basically, here you are placing an order to sell at a price that you're willing to shut out your open position. If you're taking a short position, then the idea is the same with the stop order above the entry price.
Nobody can watch their trading positions on a 24 hours basis so it is important to make full use of all the different types of automated orders so you do not get caught out. Although this can be painful at the time, the disciplined use of stop loss orders helps overcome the natural tendency of investors and traders to stick with their losses in the hope of a turnaround.
