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.

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.

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.

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 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.