Stop Orders: Protecting Your Investments from Market Volatility

A stop order is used to protect against major losses in the market. This can be a buy stop or a sell stop to protect for short or long positions that may get out of hand. In addition, there is also stop limit orders to insure the transaction is at a certain limit price. Stop limit orders are not guaranteed, especially not in fast market conditions.

Investors should always consider using stops. Using a rule of thumb, stops should be placed below the trade price by eight to twelve percent. Before knowing where exactly to put the stop, investors should paper trade for a long enough time to get comfortable with the trading. If in the paper trading your stops are always being triggered you will need to consider a less risky strategy that is able to absorb twelve percent plus losses when trading.

One can always use a ratio spread strategy, use put options, or simply commit to intermarket spreads if the stop orders are not faring well. Using put options use the main alternative to stop orders. This allows the investor the freedom to stay within the trade. However, buying puts will not fully protect the trade.