How to Set a Stop Loss Order on Fidelity

The difference between a successful trader and one who gets caught in the chaos often comes down to one thing: risk management. Imagine this—you’re invested in a promising stock, and everything seems to be going great. But then, out of nowhere, the market dips. Your stock starts to fall, and panic sets in. What do you do? This is where stop loss orders come in, a crucial tool to help you limit potential losses and protect your investment. In this article, we’re going to dive deep into how to set up a stop loss order on Fidelity, but we’re starting with something crucial—what happens when you don’t use one.

Picture this: Alex, a new investor, felt confident about a tech stock that had shown promising growth. He had done his homework, or so he thought, and invested a significant portion of his savings. For weeks, the stock climbed higher and higher. Then, in a matter of days, the market turned, and his stock plummeted 20% overnight due to unexpected earnings results. Without a stop loss order in place, Alex watched helplessly as his gains evaporated and his capital dwindled. His lack of a safeguard left him exposed to the whims of the market. This is a real scenario many investors face, and it highlights the importance of stop losses.

Now, let’s break down exactly how you can avoid Alex’s situation by setting a stop loss order on Fidelity.

Understanding Stop Loss Orders

A stop loss order is an instruction to your broker to sell a stock when it reaches a certain price, preventing further losses if the stock price starts to fall. It’s the safety net that helps you limit your downside and avoid emotional decision-making when markets get volatile. The key here is to determine your exit strategy before you even place the trade.

There are two common types of stop loss orders:

1. Stop Loss Market Order: This order triggers a sale at the market price once the stock reaches the designated stop price.
2. Stop Loss Limit Order: This order triggers a sale, but only at or above the stop price, giving you more control over the selling price, but it may not guarantee the sale if the stock continues to fall rapidly.

The real question is: how do you set one up on Fidelity?

Setting a Stop Loss Order on Fidelity

1. Log into Your Fidelity Account
   Begin by logging into your Fidelity account via their web platform or mobile app. If you don’t have an account, creating one is easy, but make sure you’ve set up your brokerage account to trade stocks.

2. Navigate to the Trading Page
   On the main dashboard, look for the "Trade" tab. This is your access point to buying, selling, and setting up special order types like stop loss orders.

3. Select the Stock and Order Type
   Enter the symbol of the stock you want to place a stop loss order on. Next, under the "Action" field, select "Sell," and then find the "Order Type" drop-down menu. Here, you’ll choose either a "Stop Market" or "Stop Limit" order, depending on your strategy.

4. Set Your Stop Price
   Now, it’s time to determine your stop price. This is where things get interesting. The stop price is the trigger point where the order will execute. For example, if you bought the stock at $100 per share and want to limit your losses to no more than 10%, you’d set your stop price at $90.

   Pro Tip: Be mindful of how far below your purchase price you place your stop. If the stop price is too tight, minor fluctuations could trigger an unnecessary sale. On the other hand, setting it too loose might not offer the protection you need. Many investors opt for a stop price about 5-10% below their entry point, depending on the stock’s volatility.

5. Confirm and Monitor
   Once you’ve set your stop price, review the order details carefully. Fidelity will show you a preview of your order, including potential fees and estimated outcomes. Once confirmed, your stop loss order is live.

When to Use Stop Loss Orders—and When Not To

Stop loss orders are great for protecting gains and limiting downside risk, but they aren’t always the best tool in every situation. For example, in a highly volatile market, the price of a stock can move quickly, and a stop loss might trigger a sale during a short-term dip, only for the stock to rebound shortly afterward. It’s essential to consider the stock’s volatility and your overall strategy.

For long-term investors who plan to hold a stock for years, short-term price swings may not be a concern, and setting stop losses could result in unnecessary sales that interrupt their strategy. However, if you're trading or holding volatile assets, a stop loss can be invaluable.

Key Considerations When Setting Stop Loss Orders

1. Stock Volatility
   Highly volatile stocks may fluctuate wildly throughout the day, which could result in your stop loss being triggered prematurely. If you’re trading these stocks, consider setting a wider stop price range or using a trailing stop loss.

2. Trailing Stop Loss
   A trailing stop loss follows the stock price as it rises, locking in profits while still offering downside protection. For example, if you buy a stock at $100 and set a trailing stop loss of 10%, your stop price would adjust upward as the stock price increases, always staying 10% below the current price.

3. Liquidity
   Stocks with low trading volume may not always find a buyer at your stop price, particularly if the market moves quickly. In these cases, a stop limit order might offer more control, although it comes with the risk that your order may not execute at all.

4. Market Conditions
   Keep an eye on market trends and economic indicators that could affect stock prices. A stop loss order might not offer full protection in extreme market conditions, such as during a flash crash or a massive sell-off. During these times, prices can drop so rapidly that your order executes at a much lower price than you anticipated.

Conclusion: Protecting Your Investments

The lesson from Alex’s unfortunate story is clear: don’t leave your investments vulnerable to the whims of the market. By using stop loss orders on Fidelity, you can set up guardrails to protect your portfolio and take emotion out of the equation. Whether you’re using a standard stop loss or a more sophisticated trailing stop loss, the key is to implement a strategy that aligns with your investment goals and risk tolerance.

Now that you know how to set up a stop loss on Fidelity, the next step is to integrate this tool into your trading routine. Start by reviewing your current holdings, determining appropriate stop prices for each, and setting up your orders. The market is unpredictable, but with the right risk management strategies in place, you’ll be better equipped to navigate it successfully.