What Is a Protective Stop?

A protective stop is a stop-loss order deployed to guard against ꦫlosses, usually on profitable positions, beyond a specific price thresh✅old.

Understanding Protective Stop

A protective stop is a strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or 澳洲幸运5官方开奖结果体彩网:limit order. A protective stop is set to activate at a certain price level and normally guarantees that an investor will make a predetermined profit or limit their losses by a 🐎predetermined amount. For example, if you buy a stock for $50 and want to limit losses to 10%, or $5, you would simply set a protective stop at $45.

A protective stop offers trading discipline to investors by helping them make important decisions about cutting losses, but it can also, at times, mitigate profitable opportunities. In other words, it can act as both a 澳洲幸运5官方开奖结果体彩网:risk-averse strategy and a profit-averse nightmare. Because it assumes that a security will continue to fall past the exit target, a protective stop can sometimes backfire with volatile securities that have a wide trading range. Hence, it is prudent to consider the behavior of the security when using or setting a protective stop. Because the "stop" acts as a floor, any subsequent rebound in that security after hitting the protective stop guarantees that the investor will be "澳洲幸运5官方开奖结果体彩网:stopped out" prior to the advance.

A protective stop is a popular strategy for risk-averse investors. Often, their tolerance for losses is far lower than other defined investor personalities. Popular tools for measuring risk include downside deviation and 澳洲幸运5官方开奖结果体彩网:semivariance. Both measures are effective 澳洲幸运5官方开奖结果体彩网:risk management techniques that can be added to a position and automatical🦹ly triggered, often without a financial advisor's intervention.

A common rule of thumb from behavioral finance says that investors experience the pain of loss two to three times as much as the joys of a gain. This phenomenon has come to be called 澳洲幸运5官方开奖结果体彩网:prospect theory. As financial advisors increasingly add psychological factors to 澳洲幸运5官方开奖结果体彩网:asset management, techniques like the protective stop maไy grow in popularꦆity.