Stop and Think Before Using Stop Losses

This column was originally published on RealMoney on July 27, 2007 at 11:30 a.m. ET. It's being republished as a bonus for TheStreet.com University readers. For more information about subscribing to RealMoney, please click here.

We need to talk exit strategies. Specifically, a reader asked what I think about using stop orders as the market has started to -- well, I don't know if it is cracking or is now simply more volatile than it has been over the last couple of years. Either way, you need to understand how to use these well, instead of simply defaulting to a one-size-fits-all strategy that won't help you beat any benchmarks.

A stop order is simply a tool that market participants can use to take defensive action. In the case of a long position, it tells your broker that once a stock hits the price you name, you want to sell at the market price . For short positions , it's set to make a buy at market price once a stock climbs to the price you specify. ...