Protective Stop

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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.

INVESTOPEDIA EXPLAINS '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.

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    An investor uses a buy limit order to buy a stock at a specific price or better price. Unlike a market order that takes the ... Read Full Answer >>
  3. What is the difference between a buy limit and a stop order?

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  4. What are some ways to reduce downside risk when holding a long position?

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  5. How do I determine where to set my stop loss?

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