I keep talking about stop loss whenever I get an opportunity. I think stop loss is one of the important strategies you will need to follow to become a successful trader or investor. Stop loss is the strategy where you can define the dollar value at which you want to sell the stock when it keeps going down. If you buy a stock at $100 and willing to take 5% loss if things go south, you can place the stop loss order for $95. If the stock trades at or below $95, your stocks will be sold. This is the simple definition. You can place a stop loss order to sell the stock either at market or at a given limit price.

It’s hard to close a position at loss. But, think about how much more you will lose if the stock keeps going down. Almost everyone gets emotionally involved when they invest in the market. Although the common wisdom dictates to keep the emotions out of the market, it’s hard to do so. Stop loss will keep your emotions out of trading or investing.

Case in point. Few weeks ago, I had a position in SWM (Schweitzer-Mauduit International). I opened the position when the stock was at $80 and placed the stop loss at $76. As you can see from the chart below, I got stopped when the stock kept going down. It was annoying when you see a stock failed you. Few weeks later, stock plunged to $47. It’s going to take very long time for this stock to come back $80 or even $76.

Remember: Losing $5 is better than losing $45.