Stop orders are among the most basic things that any trader needs to understand when entering the world of share dealing. This is because with the fluctuating nature of the shares or stocks markets, it would be very unpredictable for a trader. It is also the common tendency of many traders to overtrade because of their want to earn more profits. However, without due diligence and appropriate analysis of the trader, it may only result to a nightmare instead.
In order to protect the profits of a trader from fading as much as possible, one way that this can be done is by using the stop orders. This is actually a method in order to have a cap on the liability of the trader as far as possible. With this option, the trader will be able to have a maximum and full control over his or her trading account.
If you are quite new in this field, there are several things that you need to understand about these stop orders. Specifically, these are about the three (3) most important aspects, which include the general description of this kind of order as well as protecting the gains of the trade and, finally, limiting losses. These will be explained in the following sections hereunder.
On the one hand, a stop order in share dealing is a kind of instruction that directs to execute a sell-off at specific and predefined price point. For most traders, this is being ordered or executed in order to give them an extra hand in the trading session. The effect of this is to generally provide a broker a guide when to stop or exit a position. Hence, the primary trader no longer needs to monitor the market every single second in order to determine where the exit point is. With this kind of order, it would be automatic that when the market reaches the specific level that you have determined, then such order will be executed.
On the other hand, one of the major reasons why this is being ordered is in order to protect the gains or profits of a trader. For instance, when the position is in a situation wherein the value of the shares is already increasing resulting to a yield in profits or gains, then the normal thing that a trader would do is to want for more. However, doing such this would be too greedy. It may even result to more losses than gains. Hence, it is the best thing to know where to stop in order to protect what you have.
Moreover, stop orders are also being used in order to limit or isolate losses. This refers to the lowest level that a trader can take to lose his or her position. Hence, when that point has been reached, then that signals to exit the market.
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