Chapter 13: Using Stop Orders

Once your stock has been filled you always want to protect your downside risk.  The recommendation for trading stock is to place a stop order 3% lower than what you paid for the stock.  For example, if you bought a stock for $37.00 per share you would want to put your stop in by taking 37.00 * .03 = 1.11.  This means that you do not want to lose more than $1.11 on this stock.  You would put a sell stop order in at 37.00 – 1.11 = 35.89.  When the price of the stock reaches $35.89 the system will execute the trade.

Traders who do not use stop orders lack discipline and can lose a lot of their capital in a sudden market pullback.  A stop order protects your position when you are away from your trading account and can minimize losses.  Once you hold a position in your account, you should always have a closing stop order for that position.

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