Using Stop Loss Orders to Reduce Risk

Using Stop Loss Orders to Reduce Risk

First we need to cover 3 major questions about stop loss orders:

  • What is a stop-loss order?
  • Why should a stock market trader use stop loss orders?
  • How do I place a stop loss order?

What is a stop loss order?

A stop loss order is an order that you place through your broker that tells your broker to sell your shares if the stock price hits a specified price. When the stock price hits your stop loss price, the order will execute and your shares will be sold.

Why should I use stop loss orders?

Stop loss orders are used to reduce the risk you are taking on when you buy stocks. Stop loss orders will automatically execute when the stock price hits the lowest price you want to sell at. Generally, most traders will use a stop loss of 1-2% of their entire portfolio value. So that if the stock trade is bad, they’ll only lose 1-2% of their portfolio, which on a good day, a skilled trader can make this loss back plus more.

How do I place a stop loss order?

Placing a stop loss order will vary from broker to broker. Most online brokers have this order type in their normal order entry page. You may need to contact your broker for instructions on how to place stop loss orders using their system. With Ameritrade, it’s pretty simple. Stop Loss is one of the order types to select from.

An example of how a stop loss works.

You have $10,000 dollars in your entire portfolio. You buy 100 shares of XYZ stock at 10.00 per share. First, you need to calculate the greatest amount of money you’re willing to lose on this trade. The money we’re willing to lose is the amount of risk we are willing to take. Most daytraders are willing to risk 1-2% of their entire portfolio value. We will use 1% of our entire portfolio value in this example. The math is: (entire portfolio value) * (percentage of entire portfolio value we are willing to risk or lose). For our example, this will be $10,000 (total value) * .01 (.01 is the numerical representation of 1% – which is how much we will risk). $10,000 * .01 = $100. We are willing to lose or risk $100 on this trade.

Now we need to calculate the share price we want to set our stop loss at. You take the current value of your XYZ holdings, which is $1000 (100 shares times $10 per share). Subtract the maximum amount you are willing to lose from our XYZ value: $1000 – $100 = $900. This $900 is the amount of money we will have if our stop loss order executes. Now, take $900 and divide it by the total number of shares to get our price to set the stop loss at: $900 / 100 = $9. So, $9 is our stop loss price. This is the price you will sell XYZ at due to risk management of 1% of total portfolio value. If and when the price of the stock falls to $9, our stop loss order will automatically execute and sell your stocks.

By using stop loss orders, we know our risk and how much money we may potentially lose in a trade. Psychologically, we are prepared to accept the loss, since we know our sell out price. Stop loss orders reduce risk by limiting potential losses in poor trades.

Silver Exchange Traded Fund (ETF): SLV

Silver Exchange Traded Fund (ETF): SLV

Introducing the new silver exchange traded fund (ETF): SLV

You can get in on the hot commodities and precious metals actions without owning physical metals such as gold and silver coins. Exchange Traded Funds (ETFs) allow you to invest in commodities and precious metals, like Gold and Silver, and watch your ETF investment grow as the prices of gold, silver, and other commodities rise.

For those unfamiliar with Exchange Traded Funds, or ETFs, read my Exchange-Traded Funds – ETF on my Investing Winner blog. ETFs have many advantages and can benefit every stock trader and investor.

People have recently asked me about an exchange traded fund based on the price of Silver. One such silver ETF is the IShares Silver ETF, with ticker symbol SLV (ETF: SLV).

About the iShares silver trust etf:
Price: $138.12
Today’s Change:: +9.12 (+7.1%)

The SLV etf is sponsored by Barclay’s Global Investors and has been in the works for more than a year. Silver’s big brother gold also has an ETF in active trading, ticker symbol GLD.

Investors and traders alike have been waiting for the creation of the silver ETF. We can see their support and liking of the new SLV etf with the 7% jump in the price of the ETF, which was introduced on the stock markets on Friday, April 28, 2006.

Global investors are predicting both silver and gold will continue to rise even more than they have in the past year, due to concerns over Iran’s nuclear program, weakened dollar, gas and oil prices, and buying of precious metals by world banks.

SLV price quotes and charts

MarketClouds.com: Stock Market Trading Clouds

Indroducing Market Clouds – www.marketclouds.com – stock market activity and popularity indicator using clouds.

I have developed a new tool to assist stock market traders and investors in finding the most popular and active companies traded on all of the stock market exchanges: Market Clouds.

Market Clouds allows stock traders to quickly scan and identify the most actively traded and popular stocks, using different font sizes for levels of activity.

How Market Clouds Work Market Clouds utilizes data from across my network of websites as well as forums and IRC chatter talk to build a list of stocks people are currently and actively requesting quotes, charts, and news for.

Why are some stock tickers bigger? The most popular and actively traded stocks have the largest font sizes. Less active or popular stocks have smaller font sizes. The stocks with the least amount of activity have the smallest font sizes.

How Market Clouds Helps Traders Large font sizes allow us to scan the entire list of daily hot stocks or stocks that are very active. Traders can quickly identify the most active – they have huge font sizes and are easier to spot and read than the less active stocks. Less active and popular stocks have tiny font sizes, allowing market traders and investors to easily cut out the noise.

Put Market Clouds on Your Website or Blog! I have created a Market Clouds service I call MyCloud, allowing you to include a customizable Market Cloud on your own web page. View Market Clouds’ MyCloud in action in my sidebar on the right!

As with any research you do, you must perform Due Diligence on any potential trade. Market Clouds should be used to identify possible trades, based on their trade activity and popularity. These are the stocks people are requesting quotes, viewing charts, or reading news about. Market Clouds should be used in conjunction with other research tools and analysis. You should not buy a stock simply because it is the most active or popular stock with the biggest font size. It could be this stock is actively trading because people are selling all their shares!

Check out Market Clouds – All Stocks, the Market Clouds – Top 100, and the Market Clouds – Over the Counter Bulletin Board Stocks (OTCBB). Put Market Clouds on your website or blog with Market Clouds – MyCloudI welcome all comments and criticisms. If you have an improvement I can make, let me know. I hope you enjoy Market Clouds as much as I do!

Stock Market Clouds

I have combined stock market trading and tag clouds to create Market Clouds.

Market Clouds shows the popularity and activity of stock market companies.

The font size of the symbol is determined by the symbols market trading popularity or activity. A bigger font size means the stock is actively trading and popular. A smaller font size shows the stock is less active and less people are trading it.

I find tag clouds and market clouds fascinating. Clouds are a way to order and prioritize seemingly endless amounts of data and information flow.

Market Clouds allow you to quickly visualize the popular or active stocks of the day, by weeding out inactive or unpopular stocks by making them smaller, and showing us the juicy plays and most popular and active stocks with huge letters.

Check it out and let me know what you think about Market Clouds!

TradingWinner Back in Action

Last week I had a horrible experience. My car was broken into right outside of the office building I work at. It gets worse. I had forgotten to grab my backpack containing my laptop and my mobile computing gear. The thieves got my laptop!

I was very busy the day it happened, working on a complex database project for a client. Normally my laptop goes with me every time I go into the office. The police actually telephoned, alerting me my car had been broken into and needing to speak with me to file a report.

My laptop is still missing. I do not expect it will be recovered.

Anyways, I do most of my online development and personal surfing on my laptop. Without it, I have been barely able to manage my emails and websites. Thus, the lack of updates to TradingWinner.

I still do not have a replacement laptop. But I did get my desktop machine at my house in usable shape to perform research, browse the web, and update my sites. My laptop ran Windows XP, while my desktop computer is running FreeBSD – quite a switch to make for all my online activities!

By the way: Factory alarm systems only go off when your car door is opened. The thieves simply bashed in my rear windows and grabbed my backpack. I did not know this, but the police officer that helped me out explained this to me. I was disappointed. Time to invest in a real car alarm. Any recommendations?

TradingWinner is Back in Action.