A stop is an order to sell a stock if it falls to a specific price. If an investor owns an $18 stock, for example, they might tell their broker to sell it “on stop” if it hits $16. This may limit their losses if they paid more than $16; if they paid less, it may preserve some of their profits.

However, the triggering of the $16 stop-loss order merely means the investor will automatically put in a sell-at-market order. There’s no guarantee that anyone will bid anywhere near $16 for the stock. As well, if other holders put in stops at $16, and multiple sell-at-market orders hit the market at the same time, everyone may wind up selling for far below $16.

The funny thing about this stock trading strategy is that after all the stop-loss generated sell orders have been filled, the market may turn around and push the stock back up to $16 or higher.

You could put a limit on your sell order (if your broker will accept one). For example, you could “sell on stop at $16, limit $15.” But this is at odds with your original stock trading strategy, which was to get out of the stock if it started to plunge.

With a “trailing stop,” investors raise the price on the stop-loss order with each rise in the price of the stock. For instance, they can continually raise the price on their stop so that it is always $2 below the latest high on the stock. This means their stop-loss order will go into effect the first time the stock has a $2 setback from a recent peak.

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The problem with this stock trading strategy is that investors get out of their best stock picks too early. After all, if a stock is going to rise from, say, $10 to $100, it will go through many short-term downturns along the way. Some may be $2, some $10, $20 or even more. Investors may avoid some losses with stop-loss orders, but they’ll always sell the strong performers when they are just getting started.

As a general rule, it’s best to avoid using stop-loss orders as a stock trading strategy, especially on any sort of habitual basis. On the whole, all they do is generate extra trading and the extra commission expense that goes with it.

However, it’s better to use a stop-loss order with speculative stocks if the investor might otherwise buy the stock and forget about it. They can get away with the “buy-and-forget-it” approach for a time, if they buy high-quality stocks like those we recommend in The Successful Investor. But few speculatives ever reach that level of investment quality.

That’s why it’s best to use a three-part program of investing in well-established companies, spreading your money out across the five main economic sectors and focusing on stocks that seem to offer value that is hidden or underappreciated.

This system requires more attention and effort than using stop loss orders. But it works a lot better, in the long run if not in the short.