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Bad day in the market -- so far

As of 11:30 am CST, the DJIA is down more than 400 points. Ouch, especially after last Thursday and Friday. Wednesday's gains are history. 

I use stops on my positions, so I sold off four positions this morning. Not the best situation, but I always want to limit my losses. 

How to you know where to put a stop loss order? 

Simple, actually. Before you place an order for a stock, ETF, or futures contract (mutual funds are a bit different, since they are not traded like stocks), you first decide how much you're willing to lose. 

For example, say your interested in XYZ stock which is selling for $50. You're portfolio size is $50,000. In this case, the prudent thing to do is not put more than 25 percent in any one stock, so you will invest $12,500 in this stock. That's 250 shares. 

However, you should not really risk more than 2 percent of your portfolio, so your maximum risk should be $250. So you'd place your stop at $49.00.

If XYZ is a fairly volitile stock, you might get stopped out just on an average daily move. So you could reduce your position size 125 shares and set your stop at $48.00

If the stock moves up to $52, you'd raise the stop to $50. And so on...some brokers make trailing stop orders available, so as the stock moves up, your stop is raised automatically. 

What happens if you get stopped out and then the stock moves up in price? This happens. It's the cost of doing business. You can always buy back later, if it looks like the stock will actually begin another rally. 

Always manage and calculate your risk first. All successful investors make this a habit. 

Happy investing. 

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