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.

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  4. Above The Market

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  6. Market Order

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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?

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  6. Should I enter a limit order to buy a position with a bid and ask that are far apart?

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