So stop-losses, getting stopped out. These are terms you’re always gonna hear over and over again. I mean one of the biggest thing, a stop-loss and taking that stop will do for ya, is it will save you money and it will protect your assets. Today I’m gonna talk about some of the best practices on how to use stops.
So, first thing I’m gonna talk about is what is a stop? Why do we use them? How do we facilitate that? Et cetera.
Table of Contents
What is a stop?
So, stop-loss is going to happen. You’re gonna have losers, you’re always gonna have losers. Okay?
I don’t care if you’re a billion dollar hedge fund manager, you will have losing trades and the biggest thing you have to take into consideration is pre-planning that stop.
One of the things that, I guess would say frustrates me sometimes with newer traders is, they jump into a trade before they consider what their risk is.
They see the goal, you know? They see $100, $500, $1000 and they get excited, but they never think about the backside. What happens if this trade doesn’t work?
So something I want you to do is every time you go to enter a trade, consider what your stop-loss is gonna be. It could be a per share amount, it could be a percent amount, it could be a dollar amount.
Maybe you’re risking 50 bucks on this trade ’cause you’re hoping you can make 250 or 500. Always have that into consideration and always set that.
So then, once you enter that trade, you can put that stop-loss in. You can enter that in your brokerage account, it will vary broker by broker, but if you buy 1000 shares at a a dollar, you can put sell 1000 shares at 89 cents, if that’s your stop-loss. Get ready for that stop.
It’s gonna happen, it’s gonna happen over and over again. So be prepared.
Trailing Stop
Next thing I want you to focus on, especially if you’re a swing trader or an investor, keep in mind you can set a trailing stop. This is a powerful tool for part-time traders or maybe, listen, you might even trade full-time, you might just want to live your life.
You can put on trades in the morning, leave for the day and what the stop trailing stop, you can automate that exit.
So what that is, it’s a great way and this is built into all brokerages, where you can decide as that stock– So say you’re in a great trade, everything’s workin’ and that is trending all through the day, what you can do is set a percentage or a dollar amount or a per share price.
That if that stock dips, it enters your order and takes you out. So now, you can kind of go about your day, go about your work, go about your life and know, if you’re steadily up-trending stock drops, it will take you out and exit the trade.
Only Trade Liquid Stocks
Now, we talked about this in the beginning, this is the most important part of having a stop. Especially, with these automated orders, the stop limit or these trailing stop orders. Only and I’m begging you, only trade liquid stocks because if you’re in an illiquid stock and maybe you’ve been there, I’ve been there way too many times, I’ve learned my lessons.
If you’re in an illiquid stock and it starts droppin’ and droppin’ fast, it may blow through your stock because there’s not enough buyers, there’s not enough liquidity to take you out of that stock. So be very, very cautious even with that trailing stop, if the volume on your stock is really dropping.
What’s that mean? I mean, the best rule of thumb, and this is a rule of thumb, avoid avoid avoid stocks trading less than a million shares a day. and if anything, that’s on the bottom end of the spectrum.
But at least you know, if this stock is trading a million shares a day and you have 100, 500 or 1000 shares and it pulls hard, hits your stop, there’s enough liquidity there to get you out.
Because the worst thing in the world and I’ve been there, is to set that stop, walk away, come back, see the stock way below your stop and you’re still in it.
That can cost you a lot of money, I don’t want you to make those mistakes. So I’m trying to save you from making that mistake.
So big thing is, if you’re ever gonna walk away from one of these volatile stocks, make sure your stop is in.
Second thing, always have a stop okay? Don’t enter a trade, unless you have a stop.
If you’re entering a trade without a stop, it’s not a trade, it’s just a gamble. You’re throwing some money, you’re closing your eyes and you’re hoping something good happens.
Number three and the most important, only trade liquid stocks, avoid those illiquid stocks. That being said, let me know in the comments below, have you ever been stuck in an illiquid stock?
I’ve been there, when you’re trying to sell and all you do every time you go to exit, the price drops ’cause there’s nobody there biddin’. So every time you drop your ask, the bid drops and you literally can’t get out because the bidders just see you lowering your price and they keep chiseling you down.
And all of a sudden, you’re the only one trading the stock and it just cost you 50 cents a share or a dollar a share. So let me know, have you ever been trapped in one of those illiquid stocks? And I look forward to seeing you next time. Thanks for reading our article.
