Cut Your Stock Losses With Stop-Loss Orders
One of your priorities when trading in the stock market should be to avoid being greedy. It’s tough, and takes alot of discipline. I practice this particularly when a stock is speculative. Rather than sit and constantly watch the market every hour on the hour, I use stop-loss orders.
According to Investopedia.com, a Stop-Loss Order is an order placed with a broker to sell a security when it reaches a certain price…designed to limit an investor’s loss on a security position. A stop-loss order is also referred to as a “stop-market order”. This is because when the stock hits the price you’ve previously set, your stop-loss actually becomes a market order. The stock is sold at the best market price available.
I don’t like to lose more than 10% on any stock purchase I make. To use an example, the Derrich.com welcomed Coach (NYSE: COH) at $51.40/share. As of yesterday’s close (05/15), the stock fell 2.66% to $46.10/share. That’s a loss of 10.31% since we added it to the portfolio. A stop-loss order would have sold COH at or around $46.26/share ($51.40 - $5.14 = $46.26).
Put Me In, Coach!
Despite being down yesterday, Coach is back up about 1.5% today. In my non-financial advisor, stock market aficionado opinion, now is the time to get into the stock if you haven’t already. In a real-life situation, I would not have placed a stop-loss on Coach simply because I like the long-term outlook for the stock. I certainly have my limits, but I’m pretty confident that women all over the country are still eyeing that new Coach bag in the latest catalog.
UPDATE: Coach closed the day (05/16) up $1.36, or 2.95% recovering its previous day’s loss.
Learn and understand more about the stock market at Stock Trading 101.
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May 16th, 2007 at 9:47 am
Thanks for the link lovin man! Good luck with the Coach call!
May 16th, 2007 at 1:05 pm
Do you ever set your stop loss below technical indicators? Or always 10%?
May 16th, 2007 at 2:48 pm
Actually, I do. I didn’t want to get too technical or go off on a tangent in this post, but I will set my parameters based on technical indicators from time to time. I generally to it for stock less than $10/share. And, of course, my percentage changes as the price gets higher. 10 percent is more like a rule of thumb, and one I use 90% of the time.
May 16th, 2007 at 2:18 pm
I use stop-losses as well, or at least I try to always use them. Although I usually go a little tighter with an 8% stop loss.
If I’m riding a nice profit, as I am in a few positions right now, I’ll loosen up the stop a little more to give it some room to move back and forth while still protecting my profits.
I’ve found that using the stops eliminates the emotion from the trade, as otherwise you can easily fall into the trap of rationalizing that the stock will come back. Before you know it, that 10% loss is a 20% loss and you dug the hole even deeper.
May 16th, 2007 at 3:21 pm
Great point about emotion, Derek. That’s the hard part about battling greed/hope (if I may slash those two terms) as you alluded to.
May 16th, 2007 at 9:16 pm
I could have gotten in last year for $27 but instead, I bought Chicos (CHS). Big mistake for me. Coach is an awesome brand.
May 17th, 2007 at 9:52 pm
[…] I read an article from Derrich.com about using stop loss orders to cut your losses and I thought I would expand upon the importance of the stop-loss […]
May 18th, 2007 at 8:18 am
Thanks for the great info. I think stop-loss orders are a very important tool that can help limit investing losses.