Lately, on other blogs when I comment, I got flack for saying that “stop losses are your friend”. It was funny to know that every book written, every article published, every lecture I went to in school, all my broker friends that work for big firms agreed, yet these lame wanna be stock market gurus that peddle garbage monthly subscriptions of useless materials disagree.

Now I’m not going to rant further, but will just talk about what a stop loss is and go from there.

    Stop Loss:


An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor’s loss on a security position. It is also known as a “stop order” or “stop-market order”.

Everyone you talk to, and even yourself for that matter, had their own strategy on how to make money on the markets. Some are long, some are short, some day-trade or swing trade, regardless of the strategy, the end game to to make money from your own money.

No matter how great of an investor you are, no matter how much money you make, we all encounter losses during the year and its important to control those losses to an amount that minimal.

For those that don’t believe in stop losses, think about all the stock prices in September, big companies like (GE), (RIMM), (BAC) all were at that time, considered to be the lowest possible price, yet all went down 50% or more at today’s price. Now using basic math, you should know that when a stock price drops 50%, you need it to go back up 100% just to break even. Is that worth the time and effort?

With a stop loss, you could have cut your losses at a minimum, waited for the stock to fall further and bought back in. I did this with my parents trading account that I mange for them, I got (BAC) a couple of days after the (MER) merger was announced and the stock price I got was $24, from there, the stock fell to $18 before going back up. With the stop loss I had in place, I got my parents out of that stock at $22 and back in at $19.35. Yes, I did not get in at the bottom, but at least my avg price per share was lower than my initial and anything on the upside will be a profit (and to add, with a lower price, I was able to get more shares for my parents).

Now going back to the stop orders, there is a few things that I take into consideration when setting mine. One is the general fluctuation of a stock price. If the swing trades on the stock average up/down 10% each day, setting a stop loss below that number would be a foolish move. So typically in that situation I set my at 15%, that way the gap or swing on the downside will not automatically trigger a sell order.

Another thing I do which I HIGHLY recommend is setting a trailing stop order. This requires more involvement with your portfolio but can protect and profits you might have in a stock. Take for example:

If you own stock XYZ and bought it for $1/share. Now initially you might want to set a stop loss at 10% which means that is the stock hit $0.90, it would trigger a sell. Well, with the market rally, this stock is now all the way at $2/share. But you still have a stop loss at $0.90. This is unwise as you are up 100% but are still looking for a protected exit at 10% your initial. With a trailing stop loss, what I tend to do is keep the 10% (or whatever you decide) and reset the stop loss now to be at $1.80. That way, if the stock now goes on the downside for whatever reason, I will still walk away with a 80% profit.

This is why stop losses can be your friend. Unless you are an active day trader who is at a dedicated terminal monitors all streams and moving averages and volume spikes, the volatility of the markets can eat your portfolio and leave you with nothing. Protect your hard earned money and utilize one of the most basic investing tools known – the stop loss.

Happy Investing!

Aman, MBA

Related posts:

  1. Simplified Sunday #21 – Learning to Let Go and Cutting Losses
  2. Simplified Sunday #16 – Short Selling Intro (Part 1)
  3. Simplified Sunday #9 – Investor Tax Tips Part 2 – Capital Gains