Why Stops Are Important

What is a Stop-Loss Order?

A stop-loss order is a tradinginstruction that automatically sells a share if its price falls to a specifiedlevel, known as the trigger price. This tool helps investors limitlosses without needing to monitor the markets constantly.

Example:If you buy Commonwealth Bank of Australia (ASX: CBA) shares at $80 andwant to limit your downside to 20%, you could set a stop-loss at $64. If theshare price falls to or below that level, your shares will be sold automatically — limiting your loss to 20%.

Why Use Stop-Loss Orders?

The primary reason investors usestop-losses is to protect capital. But beyond that, stop-losses serve adeeper purpose — helping investors stick to their strategy and avoid emotionaldecision-making.

• Discipline: You define your risk     level before entering a trade.
• Automation: You don't need to watch     the market all day.
• Objectivity: Removes emotional bias     from your decision-making process.

A stop-loss can be particularly useful intimes of market uncertainty or when investing in high-volatility stocks.

Different Types of Stop Orders

Standard Stop-Loss Order

This is the most common form. It becomes a marketorder once the stock hits the trigger price. It will execute at the nextavailable price.

Trailing Stop

This version adjusts upward as the shareprice rises, preserving potential gains. The stop "trails" the priceby a set percentage or dollar amount. It only activates when the price falls bythat amount from its most recent high.

Example:
Buy at $10 with a 10% trailing stop. If the stock rises to $12, the stop movesup to $10.80. If it drops to $10.80, the order is triggered.

Stop-Limit Order

This combines a stop order with a limitorder. You set a stop price to trigger the order and a limit priceto control the lowest price you're willing to accept. If the stock falls tooquickly, the order may not execute, but it gives you more control over pricing.

How to Set a Stop-Loss

Setting the right stop-loss level is partart, part science. Here are three common methods:

1. Percentage-Based:
       Set the stop at a fixed percentage below your entry price. Common levels     are 10–20%.
2. Support Levels:
       Place stops just below key chart support points. If a stock breaks that     level, it may signal a trend reversal.
3. Volatility-Based:
       Use the stock’s average volatility (such as the Average True Range) to set     a stop that allows for normal fluctuations.

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Benefits of Using Stop-Loss Orders

Key Advantages:

• Helps reduce large losses in volatile markets
• Encourages disciplined, rule-based investing
• Supports consistent execution of your strategy
• Prevents emotional attachment to falling shares
• Can also be used to protect profits via trailing stops

Potential Risks:

• In fast-moving markets, the price at execution may differ from     the trigger
• May trigger during a short-term dip before a rebound
• Not suitable for all securities, such as thinly traded stocks

It’s important to understand howstop-losses behave in different market conditions and tailor your approachaccordingly.

How to Place a Stop-Loss on the ASX

Most Australian brokers offer basic andadvanced stop functions, although functionality varies. Some platforms allowfor trailing and stop-limit orders, while others may only offer standard stops.

Before placing a stop-loss, ensure you:

• Confirm whether your broker supports stop or trailing stop     functionality on ASX shares
• Understand how stop orders are triggered and executed
• Choose an appropriate trigger price based on your risk     tolerance

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Final Thoughts

Stop-losses are more than a trading tool —they’re an essential component of any sound investment plan. They allow you topre-define your risk, stay focused on your strategy, and avoid costly emotionaldecisions.

Whether you’re just starting out ormanaging a diverse portfolio, incorporating stop-loss orders into your processcan help you protect your capital and trade with confidence.

At Australian Stock Report, we helpinvestors develop practical, rules-based strategies to improve performance and reduce risk. Want help implementing stops or refining your entry and exitplans? Start by following us for more in-depth guides and real-time market analysis.

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