Stop-loss orders are used by many stock investors as a way to limit their potential losses. But are they an equally good idea when trading exchange-traded funds (ETFs)?

The answer is usually no. A sharp drop in an ETF's value is most likely a short-lived response to immediate market conditions. A 澳洲幸运5官方开奖结果体彩网:stop-loss order on 🍒an exchange-traded fund can j෴ust lock in your losses.

Why Is a Stop-Loss on an ETF Risky?

Suppose that you use a stop-loss 澳洲幸运5官方开奖结果体彩网:market order on an ETF and that ETF temporarily trades at a steep discount to its 澳洲幸运5官方开奖结果体彩网:net asset value (NAV)? Wha꧂t’s going to happen? Your position is going to be sold when the ETF, even briefly, hits a low pric🙈e.

You could use a stop-loss 澳洲幸运5官方开奖结果体彩网:limit order. That way, your sale isn't triggered at the botto🥃m. However, that’s still not go🥂ing to be a good trade.

You could also attempt to implement an 澳洲幸运5官方开奖结果体彩网:arbitrage strategy, but this is complicated and requires 澳洲幸运5官方开奖结果体彩网:liquidity, speed, and plenty of cash.

There are also 澳洲幸运5官方开奖结果体彩网:other order types that you can trꦿy, buꦦt they probably won't help much either.

Most ETFs track an index. Let’s use SPDR S&P Retail ETF (XRT) as an example. If XRT plunged more than 10% in a day, you would know something was amiss. It’s 𒆙simply not likely that all the stocks in the S&P Retail Select Industry Index will drop 10% or more at the same time regardless of economic and market conditions.

It's more likely that it's due to an error in a bearish and illiquid environment. That means XRT will probably mo🍃ve back up to its real value 🅰soon.

This is precisely where you would want to buy more shares, not sell. Unfortunately, if you're using a stop-loss, you're going to have no choice but to sell.

Many people were locked in losses with such stop-loss orders during the 澳洲幸运5官方开奖结果体彩网:flash crash on May 6, 2010.

What Do the Trading Pros Do?

If you have any association with the stock market, you have likely come across all kinds of traders. However, we can narrow it down to just two types: amateur and professional. The amateur trader will have several screens running at once and TV pundit voices blaring in the background. The trader's feet will be rested on top of a mahogany desk while puffing on a cigar and looking at you with an air of superiority.

The professional trader trades with discipline and conviction and 澳洲幸运5官方开奖结果体彩网:without emotion. A professional might apply 澳洲幸运5官方开奖结果体彩网:technical analysis but knows that deep research into 澳洲幸运5官方开奖结果体彩网:fundamentals is also necessary. Self-discipline and the ability to manage risk through statistical analysis are the primary 澳洲幸运5官方开奖结果体彩网:traits of a successful trader.

A professional trader who concludes that an ETF is trading well below where it should, based on solid꧃ research, will not despair and sell too soon. Instead, the professional will buy more shares incrementally.

When you have real conviction, you have no fear when purchasing more shares of an ETF at predetermined intervals. Excluding leveraged ETFs and 澳洲幸运5官方开奖结果体彩网:inverse ETFs, ETFs that track an index are not going to hit $0. Therefore, it's often only a matter of t💮ime before a rebound occurs.

Of course, you must have the trend right, unless you want to wait a long time. Traders need to understand fundamentals as well as technical analysis to determine the trend. When both are bullish, you have the trend right.

Regarding 澳洲幸运5官方开奖结果体彩网:dollar-cost averaging, you might want to consider never adding to a position below your lowest buy poin💧t. That might limit the upside potential to a certain degree, but it will preserve capital.

Furthermore, set a capital allocation limit for each ETF. Also, diversify long and short so that you can make money regardless of ꦗwhich way the market moves. If you’re long on the highest quality and short the lowest qual🧔ity, it’s only a matter of time before profits start rolling in.

How Stop-Loss Orders Work in Stocks

Stop-loss orders have value for indi✤vidual stocks. Unlike most ETFs, individual 𓃲stocks have the potential to go to $0, so a stop-loss can help keep you out of trouble.

Of course, if you’re a professional, you're not going to let greed blind you. Professional traders try to avoid owning anything that has a real potential of going bankrupt. Things can go wrong, even with seemingly respectable firms, like 澳洲幸运5官方开奖结果体彩网:Lehman Brothers.

Let's say you initially thought a retailer was going to pull off a turnaround and bought shares in that stock. The next quarter, the company misses on the top line and the 澳洲幸运5官方开奖结果体彩网:bottom line while reducing guidance for the 澳洲幸运5官方开奖结果体彩网:fiscal year. It also takes on more debt to help finance existing📖 ope🧜rations.

That’s an absolute disaster. There is no good news here, and the 澳洲幸运5官方开奖结果体彩网:risk/reward is atrocious. A pro🌄fessional trader will admit defeat and move on.

There is no guarantee a stop-loss will have the effect you desire due to the potential of a gap-down. It’s still highly recommended that you use one on speculative stock purchas❀✤es.

The Bottom Line

When it comes to stop-loss orders, your approach should depend on whether you’re trading ETFs or individual stocks. With a typical ETF, a short-term plunge is the absolute worst time to have a stop-loss in place, assuming yo🍬u read the trend correctly. Instead, this is where you want☂ to step up and buy more.

There is much higher risk with an individual stock than with an ETF because there is no 澳洲幸运5官方开奖结果体彩网:diversification. In this situation, a stop-loss should be strongly considered, ⛦especially if it is a speculative play.

Finally, do not 澳洲幸运5官方开奖结果体彩网:overtrade. In order to control your emotions and limit trading fees, avoid day trading and stick to 澳洲幸运5官方开奖结果体彩网:trend trading. Don’t go to th🌠e game. Let the game come to you.