Having traded in the stock market for over a decade, I've seen my fair share of ups and downs. One tool that's often discussed among traders is the stop loss order. While it’s lauded for its ability to minimize potential losses, I've personally encountered several drawbacks that every trader should be aware of. Here's my personal take.
In my early days, I set a stop loss order thinking it would be my safety net. But the 2008 financial crisis taught me a hard lesson. The market opened significantly lower one day, and my stop loss order got executed way below my set price, thanks to gapping. It's a real risk, especially in volatile markets.
I once held shares of a tech startup that was subjected to market rumors. Minor fluctuations triggered my stop loss, only for the stock to recover and rally 20% in the next two weeks. It was a stark reminder that markets can be erratic in the short term.
One of the most painful experiences is watching a stock soar right after your stop loss pushes you out. This has happened to me more times than I'd like to admit, making me question the rigidity of stop losses.
Early in my trading career, I leaned heavily on stop losses, sometimes setting them arbitrarily close. It took me a while to realize I was using them to soothe my anxieties rather than as strategic tools.
A pharmaceutical stock I invested in released unfavorable trial results after market hours. The next morning, there was hardly any liquidity, and my stop loss didn't execute immediately, leading to greater losses.
Being a trader who occasionally dips into long-term investments, I've found that stop losses can sometimes conflict with a buy-and-hold mentality, especially when market fundamentals remain strong.
While day-trading, the frequent triggering of stop losses not only incurred broker fees but also led to short-term capital gains tax implications, an aspect I hadn't initially considered.
I once relied solely on stop losses as my risk management tool. It was only after a series of unnecessary exits and missed opportunities that I diversified my approach to include other risk mitigation strategies.
A tech stock I believed in hit my stop loss during a market downturn. I was out, and it rebounded 30% in the subsequent month. The pain of missing out was a real lesson in considering wider market contexts.
During a trading seminar, I learned about large institutional traders who purposely push prices to trigger stop losses. It was an eye-opener about the strategic games played at higher levels.
Through trial and error, I learned the importance of setting stops based on research, past performance, and market volatility, rather than gut feelings.
I recall a day when my trading platform faced an outage, and I couldn't modify my stop losses amidst market volatility. It was a brutal reminder of technology's double-edged sword.
While stop losses have saved me from significant downturns, they've also been a source of lessons, sometimes harsh. They are just one tool in a trader's arsenal and should be used judiciously, balanced with experience and continuous learning.
About Mike Druttman
