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Stop-Loss Orders - Not Foolproof!

Stop-Loss orders are not absolute.  Using the example earlier, at the beginning of a trading day if the stock is at $15 or below, the stock is automatically sold. 

It is very important to remember that a stock can fall below the Stop-Loss position before it can be sold!  For example, a stock opens on Day 21 at $16.  It has not hit the Stop-Loss position of $15, so remains in the portfolio.  As a result of the day's trading, on Day 22 the stock opens at $13.  As the price has dropped below the Stop-Loss position, the stock is sold immediately - at $13 (not $15).  The team did manage their risk, but still lost $70,000 on their investment.

A Stop-Loss is a good way to reduce risk in a portfolio, but the amount is only an approximation as shown above.  It is effective, but remember it is not an absolute.