Investing always comes with risks, but limiting those risks doesn’t have to be complicated. There are several tools and strategies for traders designed to help reduce the risk of potential losses. One effective strategy for managing potential losses is using stop-loss orders.
What is a Stop-loss order?
A stop-loss order is an instruction to sell a stock automatically once it reaches a certain price. This order is triggered when the stock price falls below (or rises above) a specified level, and the trade is executed at the next available market price. Essentially, a stop-loss order acts as a safety net for your investments, helping limit potential losses without the need to monitor the market constantly.
There are two main types of stop-loss orders:
Stop-Loss Market Order: Executes immediately at the next available price once triggered.
Stop-Loss Limit Order: Only sells at the specified price or better, which provides more control but carries the risk that the order may not be executed if the price moves too quickly.
Stop-loss orders are especially beneficial for investors who are unable to monitor their trades on a daily basis. They provide a practical way to manage stop loss trading while balancing the potential for gains.
How to set a stop-loss order
When deciding on a stop-loss order, consider two main factors:
Personal risk tolerance
Your risk tolerance is vital in establishing the appropriate level for a stop-loss order. Ask yourself how much loss you are willing to accept before closing a position. This ensures that your investment strategy aligns with your financial comfort zone.
Allowing the trade to work out
While protecting against losses is important, setting the stop-loss too close to your purchase price may result in exiting a trade prematurely. Consider market volatility and give the trade enough room to perform, while still maintaining protection against significant losses.
Practical Example
Using the Tiger Trade app, setting a stop-loss order is straightforward:
Select the "Stop-Loss Order" setting.
Enter the price and quantity for the order.
For example, if you purchase ANZ.AU shares at $14.80 and place a stop-loss at $12.25, the order will trigger if the stock falls below $12.25. Your position will then be sold at the next available market price, limiting your loss to $2.55, approximately 17%.
Think of a stop-loss order as an insurance policy: you hope never to use it, but it offers peace of mind knowing your downside is limited.
Please note that for the mobile app, the stop-loss order function is only available on the pro version of the order page.
Using stop-loss orders wisely allows investors to manage risk, maintain discipline, and stay confident in volatile markets. To keep building your trading knowledge, explore additional resources on our Tiger Brokers Learn page!
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