A stop loss order is meant to alert your stock broker to close your stock positions when the price hits a certain price. For example you may want to get out of the stock position before it falls any farther. You place in advance a waiting order in your broker’s trading system. You tell your broker you want a stop loss order at a certain price on the stock. When the stock hits that price, your stop loss order becomes a market order. Your order will then be executed immediately at the prevailing market prices.
A stop loss orders acts like an insurance to your stock at a very minimal commission fee to your broker and may save you from huge losses. Since you place the stop loss order when you open your stock position, your stop loss will take the emotion out of a decision to close your stock position. This control of your emotions is the single most important thing about stop loss order. Set that automatic stop loss today and not tomorrow.
If you really do know how to compute the market price where to place a stop loss order, then getting stopped by a stop loss order is a strong enough signal that the market may change direction or the trend.
If the stop loss gets you out of market, you stay out of the market without participating again until when the market will form an appropriate trough or crest to start a new position. Sometimes it may take one or two months for an appropriate trough or crest to form during which you will be out of trading. Time spent when you are out of trading is time wasted and time is money. The big question is whether it’s right to be out of trading and wait for one to two months because you do not know exactly what the market is doing?
The moment you see the stop loss penetrated, then, the market becomes very unstable because you do not know where it will head next. But the logic is that the market can only have three options.
This story is continued here: How to Bulldoze the Stock Market Using Stop Loss Order
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