What is a Stop Loss Order?

You never want to use your car insurance policy. Whenever that policy becomes necessary, something has already gone wrong. But how much worse would it be to get into an accident without insurance? A stop loss order is like an insurance policy for your trading strategy.

In his recent NinjaTrader Ecosystem webinar, Trade with Discipline Manager, TREMPER.com founder Steve Tremper explained how stop loss orders help you manage risk. He said that it is impossible to know the risk/reward ratio of a potential trade because the reward element is always unknown. You can’t tell how successful (or not) a trade will be ahead of time. Therefore, the trader is only able to control the risk element of the trade – by using a stop loss.

Stop loss orders will automatically close your position once a specific price threshold (called a “stop price”) has been reached. There are multiple kinds of stop loss orders:

• Stop Market Orders – These orders execute immediately at the best possible price once the stop price is hit
• Stop Limit Orders – These are placed when the stop price is hit but won’t execute except at a pre-specified price. This allows you to control when the order executes, but risks the order not being filled.
• Trailing Stops – These change in proportion to (or “trail”) a rising price. When price starts to drop again, they lock into place.

Of course, specifying a stop price that is too “tight” can cause you to miss opportunities by pulling you out of the market too quickly.

Because of this, it is important to analyze exactly what stop is needed in any given trading scenario. No two markets are the same; they all have unique characteristics that set them apart. Similarly, every trader has a unique trading style. This means that it is your job to evaluate the market – as well as your risk tolerance – to decide where to place your stop.

Tremper said that one of the keys to successful risk management is to be disciplined in following through on the limitations you set for your trading. “Don’t move your stop loss once adjusted,” he said. “I feel it’s better to get out and re-evaluate. If your rules still are met, re-enter. Otherwise, let it go.”

In this short clip, Tremper explains more about his perspective on stop loss orders.

If you want to hear more about what Tremper has to say about trading discipline, check out his full-length webinar, which is available to stream free today! Be sure to also take advantage of the hundreds of hours of free video content found in the NinjaTrader Ecosystem’s library of on-demand webinars. If you want to attend future events live, you can view a schedule of upcoming webinars and register for any that catch your interest. New events are added regularly, so be sure to check back often. To get email updates about these events, simply enter your email address into the box at the bottom of this page.