Stop losses: If you are holding a share in the hope that it will go up, but you wish to guard against a sudden fall in its value, you can set a ‘stop loss’ on that shareholding. A stop loss is a trading tool. It is in effect an instruction to your broker to sell that particular share if it falls below a certain level. This can prevent a small loss (say, 20%), from turning into a much bigger one – without you having to watch all your shares like a hawk.
Once you have set your stop loss where you want it, your broker will not waste time contacting you for permission to sell your shares – they will be sold automatically. This prevents valuable time (and money) being lost when a share is falling fast. However, you should be aware that stop losses are not 100% reliable, especially in rapidly falling markets. It may be that your shares are sold but at less than your stated stop loss price.
Deciding where to place stop losses is not always easy, particularly with highly volatile shares. The more volatile a share’s price (the more it flies up and down), the more unpredictable the results of using stop losses. Remember that once you have set a stop-loss, your broker is bound to act on it and it is up to you to cancel it if you change your mind.
Obviously, if a share price goes up and down by a significant amount regularly then, if your stop loss is too tight (as in too close to the price paid for the shares), you could end up selling your shares only to see them rise back up into profit! This is what traders refer to as ‘being whipsawed’. Naturally, you can also get caught out the other way too - if you set your stop loss too loosely (too far below your buy price) you could end up with a big loss.
Using stop losses effectively is something that comes with experience – even then you won’t always get it right going it alone. But, having an account with the stop loss facility is very important, even if you rely on the advice of an expert when choosing where to set your stop losses. Kewill Ludens, the editor of TheShareWeekly is just such an expert – he has developed his trading rules over many years of successful investing. Those rules are the foundation of his amazing success rate – and the profits he delivers for his subscribers. Click here to
find out more about TheShareWeekly.
Compare online frequent trading stockbroker accountsLimit Orders:Brokers may also offer the facility to place limit orders. Limit orders allow you to specify certain share prices at which your broker will attempt to execute trades on your behalf. Limit orders are of two types: open-ended also known as ‘good till cancelled’, and time-limited. Most investors use time-limited orders, which last for a day or a week, to automatically trigger a buy or sell order when a share rises or falls past a certain price. The different types of limit order generally available are as follows:
Buy limit
Sell limit
Rising buy
Stop loss (discussed above)
Buy Limit:When you place this type of order, your broker’s electronic trading system will attempt to
buy a specified share ‘at no more than’ the price you specify. So, if you have been watching a particular share, but you do not wish to buy in until it
falls to a certain level, you can put in a buy limit at that lower price. Then, when the share price falls to that point the buy order should be triggered.
Sell Limit:This type of order instructs your broker to
sell shares when their price rises beyond a specified point. Effectively, you are telling your broker to sell ‘at no less than’ the price you specify. So, if you decide that you wish to get out of a share when it
rises to a certain price, a sell limit allows you to set this up automatically.
Rising Buy: This limit order enables you to place a
buy order with your broker at a specified price that will only be triggered if the share price
rises to that point. This is useful if you are trading in fast-moving shares or you are watching to see if a given share is going to break through a trend-line or out of a trading range. If the share does break upwards into new territory, and, in doing so, passes through your target price, your broker will automatically attempt to buy in on your behalf.
Stop Loss:This is probably the most common and important type of limit order. As such it is discussed separately above.
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