Protective Stop


DEFINITION of 'Protective Stop'

A strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or limit order. A protective stop is set to activate at a certain price level and assures that an investor will make a predetermined profit or lose a predetermined amount. For example, if one buys a stock for $50 and wishes to limit losses to 10%, one would simply set a protective stop at $45.

BREAKING DOWN 'Protective Stop'

Although a protective stop is considered to be a risk-averse strategy, it can also be profit averse. Because it assumes that a stock will continue to fall past the exit target, a protective stop can sometimes backfire with volatile stocks that have a wide trading range. Hence, it is prudent to consider the behavior of the security when using or setting a protective stop.

  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches ...
  2. Limit Order

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  3. Material Amount

    The movement of a security's price to the extent that it confirms ...
  4. Above The Market

    An order to buy or sell at a price set higher than the current ...
  5. Below The Market

    An order to buy or sell a security at a price that is lower than ...
  6. Market Order

    An order that an investor makes through a broker or brokerage ...
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  1. Why can't I enter two sell orders on the same stock?

    To answer this question, let's look at a few different situations. You bought a stock for $10 but want to be able to protect ... Read Full Answer >>
  2. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  3. How do I set a strike price in foreign exchange trading?

    In trading with a foreign exchange, a trader can set a strike price for a currency pair by entering a limit order or a stop ... Read Full Answer >>
  4. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>
  5. Are stop orders only used for stocks?

    Stop orders can be used for a variety of securities and are not limited to stocks. They can be extended to other securities, ... Read Full Answer >>
  6. Should I enter a limit order to buy a position with a bid and ask that are far apart?

    You face the risk of losing the spread in a security with a bid and ask that are far apart when you enter a market order. ... Read Full Answer >>

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