Stop Loss

Stop loss trading helps to mitigate downside risks of a security and is particularly useful for investors who do not have the time to monitor their trades by the minute on a day to day basis. In the case study, historical prices and data were downloaded to formulate a strategy and to place a stop-loss order to protect the investment. While it is a good idea to come up with a stop loss target price based on historical analysis, one must keep in mind that past performances may not determine future results. A stop loss target price which had worked well in the past may not work well again as prices may go past historical resistance and support levels. Therefore, it would be advisable for the investor to continue monitoring his stock and adjust his stop loss target accordingly. Even if he could not monitor the stock daily, he should at least monitor weekly or subscribe to alerts which would send him a notification if the price breaks through a certain support level. He could also use a trailing stop loss to help lock in higher gains if the stock price moves up.

In addition, the investor needs to consider the growth of the company. If a certain stock has shown to be consistently growing at a steady rate every year and paying good dividends, he may be better off with a buy-and-hold strategy rather than employing a stop-loss which would be triggered on short-term fluctuations. Many stocks which have plunged in times of recessions quickly recovered to their pre-crisis level or higher so putting a stop loss target will curb the upside of your investment.