What is 'Stopped Out'

Stopped out is a term used in reference to the execution of a stop-loss order. Often times, the term stopped out is used when a trade unexpectedly hits a stop-loss point and the trader generates a loss.

BREAKING DOWN 'Stopped Out'

Stop-loss orders are an effective strategy for limiting potential losses, but they may be unexpectedly executed during times of high volatility. Often times, the term stopped out is used in a negative connotation when a trader’s position is unexpectedly sold. Traders can be stopped-out while being either long or short in any type of security where stop-loss orders can be placed, but it’s often used by day traders in the equity and index futures markets.

Traders are often stopped out when a market whipsaws – or moves sharply in one direction before returning to its original state. For example, a stock may whipsaw during an earnings announcement or other market moving event.

Example of Stopped Out

Suppose a day trader buys 100 shares of stock at $100.00 per share and sets a stop-loss at $98.00 and a take-profit at $102.00 ahead of a key earnings announcement. After the earnings announcement, the stock may move sharply lower to $95.00. The day trader would have been stopped out at $98.00 due to the stop-loss point, despite believing that shares wouldn’t have reacted that negatively to the news.

Avoiding Being Stopped Out

Traders have a couple different options to avoid getting stopped out, including keeping stop-loss levels in mind and using stock options to hedge against a decline.

A mental stop involves keeping a stop-loss price in mind rather than placing an actual order. By doing so, the trader can avoid being stopped out during a whipsaw. The risk is that the whipsaw never occurs and the stock continues to move in the wrong direction. In many ways, mental stops negate the entire purpose of using stop-loss points to mitigate risks since there’s no guarantee that the trader will remember or choose to actually sell shares.

Many traders use options as an alternative to stop-loss orders. By using put options, traders can hedge a stock position without actually selling the shares. For example, a trader who owns 100 shares of a stock may purchase a put option on those shares with a strike price equal to the desired stop-loss point. If the stock were to whipsaw, the option trade would protect against downside without prematurely selling the shares.

The Bottom Line

The term stopped out refers to the execution of a stop-loss order. Often times, the term is used as a negative statement when a stop-loss level was accidentally hit during a period of high volatility. Traders can mitigate the risk of being stopped out by using stock options instead of stop-loss orders to control for risk factors.

RELATED TERMS
  1. Stop Hunting

    Stop hunting is a strategy that attempts to force some market ...
  2. Stop-Loss Order

    A stop-loss order is an order placed with a broker to sell a ...
  3. Stop Order

    A stop order is an order to buy or sell a security when its price ...
  4. Hard Stop

    A hard stop is a price level that, if reached, will trigger an ...
  5. Protective Stop

    A protective stop is a strategy designed to protect existing ...
  6. Gather In The Stops

    Gather in the stops is a trading strategy of driving down a stock's ...
Related Articles
  1. Investing

    Exit strategies: A key look

    Find out strategies for setting appropriate exit points when trading to help you avoid taking premature profits or running investment losses.
  2. Investing

    3 Cases When Not to Place Tight Stop-Loss Orders (IBB, XBI)

    Learn about using stop-loss orders for exchange-traded funds. Discover the circumstances when using a tight stop-loss order may not be appropriate.
  3. Trading

    Risk Management Techniques for Active Traders

    Learn how active traders manage risk through the use of stop-loss and take-profit points.
  4. Investing

    Stop Loss Order Strategy

    A stop loss order is an order placed with a broker to sell a stock immediately if it drops to a certain price. It's a common way for investors to protect themselves from the possibility of a ...
  5. Trading

    Stop-Loss or Stop-Limit Order: Which Order to Use?

    While both can provide protection for traders, stop-loss orders guarantee execution, while stop-limit orders guarantee price.
  6. Trading

    Options: An Alternative To Stop Orders

    Learn how using options instead of stop-loss orders adds finesse and control in limiting losses.
  7. Trading

    Can These Momentum Stocks Break Out One More Time?

    Here are some levels to watch for another breakout in these high-momentum stocks.
  8. Trading

    Use Stops To Protect Yourself From Market Loss

    Master these simple risk management strategies to protect your portfolio or trading account from large losses.
  9. Investing

    Protect Your Investments With a Stop-Loss Plan

    A market contraction is looming, and it is in your best interest as an investor to consider adding stop-loss protection to your portfolio.
RELATED FAQS
  1. How do I place a stop-loss order?

    Learn how to place a stop-loss order and how traders use stop orders to either limit potential losses or to protect part ... Read Answer >>
  2. Can a stop-loss order protect a short sale?

    Stop-loss orders work equally well (or poorly) for long and short sale positions. Read Answer >>
  3. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  4. Do Stop or Limit Orders Protect You Against Gaps?

    Regardless of the type of stock order you place, there's no surefire protection against gaps. Read Answer >>
Trading Center