Stop Losses – No Guarantees

You count on your stop loss to keep you out of trouble

You count on your stop loss to keep you out of trouble – don’t count on it too much

SparkProfit lets you earn points whether you predict the market will rise or fall. It’s the difference between the starting price and your prediction that makes the value of your trade bigger or smaller in the game. In the real markets, traders usually lose money if the stock they buy drops (unless they are shorting the trade, but more on that another time). The trick, just like SparkProfit, is to buy when you think the price is low compared to its true value and you believe it is going to rise.

But, as any SparkProfit player knows, stocks, currencies and other markets can be rather unpredictable. No matter what has happened historically there are many variables that can affect the direction of the market. So what should you do? 

Many day traders constantly watch the markets ready to place a buy or sell order with their broker depending on movements in the market. And that is a good strategy which can maximise your profit by locking in a sell order at the peak and it can also protect you from losses if the market turns.

But for many of us who have busy lives with jobs and other commitments, it’s a strategy we simply can’t adopt. We are time poor so we need a different plan. This is where a Stop Loss Order comes in. 

A Stop Loss Order is an instruction to the broker to sell at a certain price. That way you can relax a little knowing that even if the market drops, your losses will be capped even when you’re looking the other way.

All this sounds really good but there’s a question you need to ask yourself and it is:

Why aren’t Stop Loss Orders any good at stopping losses? 

Wait – what? It’s true – like any market order, your broker can’t guarantee the price you’ll get so you could lose far more than you wanted.

Brokers make no guarantee as to the price the stop order finally fills

Brokers make no guarantee as to the price the stop order finally fills at

The Stop Loss Order in the graphic above triggered the broker to place a sell order but time passes between the two events. In a fast market, the price may have moved significantly in that time so you lose a lot more than you allowed for.

And that’s not all. You could be faced with a stock gap down between trading days

Market Swing infographic

So Stop Loss Orders are not as good as they first sounded, are they?

And that got us thinking. There should be a better way to trade. One where you don’t face losing everything. Doesn’t that sound better?