How to Set Stop Loss on Robinhood – Complete Guide
What is a Stop Loss Order?
A stop loss order is a powerful tool used by investors to limit potential losses and protect profits when trading stocks. It acts as a safety net, automatically triggering a sell order if a stock’s price falls to a predetermined level. By setting a stop loss, you can effectively manage your risk and prevent significant losses in volatile market conditions.
Stop loss orders are particularly useful for short-term traders and those who may not have the time to constantly monitor their positions. They provide peace of mind, knowing that if a stock’s price takes an unexpected turn, your losses will be capped at a level you’re comfortable with.
How Stop Loss Orders Work
When you place a stop loss order, you specify a stop price – the price at which you want your shares to be sold if the stock falls to that level. Once the stock hits your stop price, the order becomes a market order and your shares are sold at the next available price.
For example, let’s say you purchase a stock at $50 per share and set a stop loss at $45. If the stock’s price drops to $45 or below, your stop loss order will be triggered and your shares will be sold at the prevailing market price, limiting your loss to around 10%.
Types of Stop Loss Orders
There are two main types of stop loss orders:
- Stop Market Order: When the stop price is reached, the order becomes a market order and is executed at the next available price. This ensures immediate execution but does not guarantee a specific price.
- Stop Limit Order: When the stop price is reached, the order becomes a limit order, which will only be executed at the limit price or better. This provides more control over the execution price but may not be filled if the price moves past your limit.
Setting Up Stop Loss on Robinhood
Robinhood, a popular commission-free trading app, makes it easy to set up stop loss orders and protect your investments. Here’s a step-by-step guide on how to place a stop loss order on Robinhood.
Placing a Stop Loss Order on Robinhood
- Open the Robinhood app and navigate to the stock you want to place a stop loss order for.
- Tap the “Trade” button and select “Sell”.
- Choose “Stop Loss” as your order type.
- Set your stop price – the price at which you want your shares to be sold if the stock falls to that level.
- Enter the number of shares you want to sell.
- Review your order details and submit.
Once your stop loss order is placed, Robinhood will monitor the stock’s price and automatically execute the sell order if it reaches your specified stop price.
Modifying and Canceling Stop Loss Orders
If you change your mind or market conditions shift, you can easily edit or cancel your stop loss order on Robinhood at any time before it’s triggered. Simply go to your Orders page, select the order you want to modify, and make the necessary changes or cancel the order altogether.
Keep in mind that stop loss orders are not foolproof and may be executed at a price significantly different from your stop price in fast-moving markets. It’s important to regularly review your positions and adjust your stop loss levels as needed.
Tips for Using Stop Loss on Robinhood
While stop loss orders can be a valuable risk management tool, it’s important to use them strategically to maximize their effectiveness. Here are a few tips to keep in mind when setting stop loss orders on Robinhood.
Determining Your Stop Loss Level
One of the key decisions when setting a stop loss is determining at what price level to place your order. A common approach is to look at the stock’s support levels – price points where the stock has previously found buying interest after declining. Setting your stop loss just below these levels can help protect against normal price fluctuations while still limiting downside risk.
Another factor to consider is your personal risk tolerance and investment goals. A tighter stop loss, set closer to the current price, will limit your potential loss but may also result in more frequent sell orders. A looser stop loss gives the stock more room to fluctuate but exposes you to greater potential losses.
As a general rule, many traders aim to risk no more than 1-2% of their total account value on any single trade. So if you have a $10,000 account, you might set your stop loss to limit your loss to no more than $100-$200 on a given stock.
Avoiding Common Stop Loss Mistakes
While stop losses can be powerful tools, they can also work against you if used improperly. One common mistake is setting your stop too tight in an attempt to avoid any loss whatsoever. This can lead to your position being unnecessarily stopped out during normal market volatility, causing you to miss out on potential profits when the stock bounces back.
Another pitfall is chasing a stock – continually adjusting your stop loss upward as a rising stock makes new highs. While it’s tempting to try to lock in profits, this often leads to the opposite result, as the stock eventually reverses and triggers your elevated stop, resulting in a smaller gain or even a loss.
The key is to set a reasonable stop loss level that balances risk and reward based on your analysis of the stock and overall market conditions, then let it do its job without micro-managing the trade.
Stop Loss vs Stop Limit Orders on Robinhood
While stop loss and stop limit orders are similar, there are important differences in how they work that are important to understand. Here’s a breakdown of the key distinctions between stop loss vs stop limit orders on Robinhood.
| Order Type | Trigger | Execution |
|---|---|---|
| Stop Loss | Stock reaches stop price | Market order at next available price |
| Stop Limit | Stock reaches stop price | Limit order at specified limit price or better |
When to Use Stop Loss or Stop Limit
The choice between a stop loss and stop limit order depends on your priorities and the specific market conditions you’re dealing with. In general, stop loss orders are better for ensuring execution, while stop limit orders are used when you need more control over price.
For example, if you’re trading a highly liquid stock and your main goal is to exit a position quickly if it moves against you, a stop loss market order may be the way to go. You’re willing to accept the market price in order to get out of the trade fast.
On the other hand, if you’re dealing with a thinly traded stock or one with wide spreads, a stop limit order may be preferable. The limit price constrains how far the price can move before your order is filled, potentially preventing an unexpectedly bad fill in a fast-moving market.
Robinhood Stop Loss FAQs
Still have questions about using stop loss orders on Robinhood? Here are answers to some of the most common queries:
- Can you set a stop loss on Robinhood after buying? Yes, you can set a stop loss order on a stock you already own at any time.
- What happens if a stop loss triggers after hours? The stop loss will be queued until the next market open, at which point it will be executed.
- How long do stop loss orders last on Robinhood? Stop loss orders remain active until they are either executed or you cancel them.
- Why did my stop loss not execute? There are a few potential reasons – the stock may have gapped past your stop price overnight, or there may have been insufficient liquidity at your specified price in a fast-moving market.
Stop loss orders can be a powerful ally in your investing toolkit, but like any tool, they must be used properly to be effective. By understanding how they work, setting appropriate stop loss levels, and avoiding common pitfalls, you can employ stop losses on Robinhood to help manage risk and protect your hard-earned investment gains.
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