Investor's Corner: Stop Orders Can Get You In, Out On Time

One way to avoid big losses in this roller-coaster market is to set stop-loss orders. Just instruct your broker to sell your shares of XYZ Corp. if they fall to a certain level.

If the stock does fall to that level, the stop-loss order becomes a market order to sell.

Such an order will strip emotion out of the equation and will protect profits or limit losses.

This is especially useful if you're going on a trip and won't have time to watch the market on a daily basis.

You can also place a buy-stop order when a stock is close to clearing a base. Your buy stop becomes an order to buy at the market when the stock rises above a certain price.

And you can add a limit price so you won't get into the stock if it's gapped up, say, 15% that day.

Be careful. This strategy does not account for volume changes. If a stock breaks out on light volume, you may get your order filled while you may have otherwise decided not to buy it.

The same is true on the downside. If a leading stock pulls back in lighter trade, it may not be an alarming event. Many leaders will go through pullbacks before surging to bigger gains. It's in such situations that you need to exercise caution.

This is also why you can never leave trading just to the computers.

Be sure to check your portfolio at least once a day. This will let you review your stop orders on a regular basis so you're not surprised one day by an old order that you had forgotten about.

Take Mosaic (NYSE: - ), a highly rated big-cap fertilizer company. A relatively recent addition to IBD's Big Cap 20, the stock has been trading wildly in recent weeks.

But in June, it looked like it may be forming a flat base (point 1). Placing a stop-loss order at no more than 8% below your cost would have saved you from the stomach-churning ride the stock went on more recently (point 2). It would certainly have been emotionally difficult to hang on to this investment during that period of high volatility.

Even though the stock has nearly recovered (point 3), what are the chances you would still own it? Meanwhile, you may have booked a larger loss. Notice how the base has become defective due to the wild swings.