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A stop loss order, or “hard stop” as we call it here at MIC, is placed with a broker to buy or sell a security when it reaches a specific price. Stop loss orders are designed to limit investors’ losses on security positions. 

For example, let’s say you own stock in Company XYZ, which you purchased for $50 per share. However, you’re concerned that the stock might drop in value, so you place a hard stop with your broker at $45 per share. If the stock falls to $45 per share, your broker will automatically sell the shares, limiting your loss on the position to 10%. 

Stop loss orders can also be used to protect profits. For example, Company XYZ’s stock rises to $60 per share, and you want to protect your profits. You could place a hard stop at $58 per share. Suppose the stock price falls to $58 per share. In that case, your broker will automatically sell the shares, ensuring that you lock in an 8% profit on the position. 

Stop loss orders are not foolproof, however. A security’s price can fall below your stop loss price in fast-moving markets without being traded. This is known as slippage, which often occurs during periods of high volume or volatility. As a result, hard stops may not always limit an investor’s losses to the desired amount. 

Why Use a Stop Loss Order? 

There are two main reasons why investors use stop loss orders: 

1) To limit their potential losses on a security 

2) To protect their profits 

When Should You Use a Stop Loss Order? 

One common misconception is that stop loss orders should be used on every trade. However, this isn’t necessarily true. While stop losses can help limit your losses but also prevent you from making money. Suppose a security’s price rebounds quickly after falling below your stop loss price. In that case, your loss is limited but so are your profits. 

As a result, whether or not to use a stop loss order is a matter of personal preference and risk tolerance. Some investors are comfortable with incurring small losses in hopes of letting their winners run. Others prefer the peace of mind that comes with knowing their downside is limited by using stop loss orders. 

There are no right or wrong answers when using hard stops; it ultimately depends on what makes sense for your individual trading style and goals. 

Stop loss orders can be handy tools for day traders looking to limit their potential losses on trades. However, it’s important to remember that they’re not foolproof, and there’s no guarantee that they’ll always limit losses to the desired amount. Whether or not to use stop loss orders is primarily a matter of personal preference and risk tolerance.

About the Author
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Joe Kelly

Joe Kelly is a versatile entrepreneur with a passion for day trading, product design, and real estate investing. As the creator of My Investing Club's flagship course, the Day Trading Jumpstart Accelerator, Joe has made a name for himself in the financial world since he began trading the market in 2015. Specializing in options, large cap day trading, and swing trading, Joe possesses a wealth of knowledge and experience in small cap stocks, which was his primary focus for the first five years of his trading career. This expertise has led him to mentor countless individuals, sharing his insights and strategies for success. When Joe is not busy making strides in the financial sphere, he can be found cooking up some of the most delectable steaks and smoking mouth-watering, Texas-style BBQ. A man of many talents, Joe enjoys playing guitar and woodworking in his spare time. Family and outdoor activities play a significant role in Joe's life. He loves spending quality time with his wife and children, engaging in a wide array of outdoor pursuits such as fishing, bike riding, hiking, swimming, skiing, tubing, and volleyball. Joe's enthusiasm for everything outdoors and his diverse range of interests make him a well-rounded individual, both in the professional and personal realms.