In this day and age of online brokers for virtually every market out there, there are some very useful tools that will help protect your account and lock in profits if you have them you. It is our recommendation that you use a good online broker and take advantage of not only the low commissions they offer, but also the automated tools that are available. These tools are almost idiot proof if you use them. The number one reason that the accounts of people go belly up in the markets because they lack the discipline to stick with their business plans and let emotions drive their trading decisions. This approach is a guaranteed way to lose in the markets. Oh, you might get lucky occasionally, but eventually the market will take your money. Let's discuss some of the trading tools we are talking about.
Stop Loss - Also called a "stop", this is the price at which your position is automatically closed. If you buy IBM at $ 50 per share, and then enter $ 45 as your stop level, then your position will be sold when the price hits $ 45. So this allows you to protect a great loss your account. Keep in mind, however, that this stop level only "triggers" closing the position and is no guarantee you'll get off at that price. A rapid decline could mean that your order is executed at $ 42 instead of $ 45 because of market volatility - but this would be an extreme case. Even if you wear at night and IBM's position opened at $ 40, then the price would be sold. Keep in mind that if you "shorted" IBM had $ 50, then your stop would be placed above the $ 50 to protect your account. When the stop is activated on a short position, you would buy to cover the position.
Buy Stop - The above description refers to a "sell stop", but there are also "buy stops" that can be very helpful. These are used to specify the position at some point. Suppose you use a trading system requires that you buy from a stock breaks above a certain price level. Let's say you wait for IBM to break out of a channel and to do that, it should reach $ 51. In this case, you only have a buy stop at $ 51 for the number of shares you wish and the system of your online broker will buy that for you automatically when IBM gets $ 51. The only thing you should do and check back occasionally to see if the order is filled.
These two instruments, to stop the sale and purchase stop are invaluable for traders - especially those just starting out. Make this a habit from day one in your trading - ALWAYS place a stop loss filled immediately after getting an order. Obey this rule and the market will never hurt very badly - you'll have a hard sting every now and then, but you'll stay alive to come back another day!
Chuck Cox is a technical writer and Industrial Scientist by professional with a background in statistics. He used mathematical and statistical methods to invest and trade in the stock, futures and options markets. Chuck has several companies owned and currently operates several websites. To investigate a new idea stock trading visit his website, Online Stock Trading Reviews
