Stop loss is an important part of any trading strategy, yet many traders either don’t use it or don’t use it effectively. In this article, we’ll discuss what stop loss is, why you need it, and how to use it properly. By the end, you should have a good understanding of how to use stop loss to your advantage.
So let’s get started!
What is stop loss
Simply put, a stop loss is an order that you place with your broker to sell a security when it reaches a certain price. This is done in order to limit your losses on a trade. For example, let’s say you buy shares of ABC Company at $10 per share. You may place a stop loss order at $9.50, which means that if the stock falls to $9.50, your broker will automatically sell the shares.
There are two main reasons why you would use stop loss. First, it can help you protect your profits. If a stock starts to fall sharply, your stop loss order will ensure that you sell the shares before they lose too much value. Second, stop loss can help you limit your losses. If a stock falls below your stop loss price, you will sell the shares and cut your losses.
Now that you know what stop loss is in general terms and why you need it, let’s discuss how to use it effectively. First, you need to decide where to place your stop loss. This will depend on your risk tolerance and trading strategy. For example, if you’re a risk-averse trader, you may place your stop loss closer to your entry price. On the other hand, if you’re willing to take more risk, you may place your stop loss further away from your entry price.
Second, you need to decide how large of a loss you’re willing to take. This will again depend on your risk tolerance. You may decide that you’re only willing to lose $100 on a trade. In this case, you would place your stop loss at a price that would allow you to sell the shares and lose no more than $100.
Third, you need to monitor your trade closely. Once your stop loss is in place, it’s important to keep an eye on the stock price. This way, if the stock starts to fall sharply, you can exit the trade quickly and limit your losses.
Many new traders don’t fully understand the importance of stop loss. They see it as an unnecessary inconvenience that just gets in the way of their profits. But the fact is, stop loss is one of the three fundamental parts of profitable trading, right alongside take profit and entry.
By understanding and using stop loss properly, you can protect your profits and limit your losses. So next time you’re getting ready to enter a trade, make sure you’ve got your stop loss in place. You may be surprised at how much it can help your bottom line!
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