Trading is a game, a zero-sum game. In this zero-sum game the gain of one trader is gets equalized by an equal loss of other trader. The ‘gain’ of one man is the ‘pain’ of other man. Everyone dream’s to be stayed on the winning side of the market. But who can predict the direction of the market? It is a useless question. The truth is no one can predict the direction and trend of the market. Sometimes it may go up and in some other time it may go down. So the profit or loss which we have to face is according to volatility of the market. That means we should move in accordance with the trend of the market.
What is Stop-Loss?
If we buy an asset, the next step is to book target for the higher price. But as I said no one can predict the market. If the market moves up only then we can exit with more profit. On the other hand if the market moves in downward direction we will be in lose. Here comes the idea of stop loss. As the word means it stop the loss. So when we put first target as a sell order at the same time you have to put stop loss as the sell order to protect you from the bigger lose.
Stop loss is actually an order that placed in advance to sell or buy a share when it comes to a certain price value. It limits your gain or loss. Short-term as well as Long-term traders use this type of stop loss order. By paying a certain amount of brokerage an investor can place this automatic order with the help of their broker/agent. Stop loss may be a ‘stop order’ or ‘stop-market order’.
How does it work?
A trader directs the broker to sell or buy a security when it reaches a predetermined price value. The brokers help the trader cut losses by the live market bid price by observing the trading regulation. A trader would direct his/her broker to set the limit against the purchased stock If trader A wishes to place an order for the shares of company X at a certain price point. Stop loss order will automatically execute when the stock value reaches the pre-set price and purchase the required stock. You must have to sell it if you already have the shares of company. So when the price reaches at a particular high or low you ask your broker to sell them.
Accordingly, once the price value matches the set limits it will get executed automatically if you placed the order before. This tool is commonly used by short-term Investor. This is mainly used to limits his/her pressure while watching the security in daily basis. The limits are set in advance and the trades are automatically triggered. Usually small investors keep using this. So while you are doing online trading you should always maintain stop loss and keep it tight because stop loss can protect you from great losses.
Why Stop-Loss is important?
Even though you have keen market insight and great trading strategy strings of losses can occur. This not because of the failure of your strategy market is works in this way. So if you take high risk on each trade, a small string loss can wipe out your account. So placing stop loss order is a smart move to protect traders from unbearable losses.
Importance of trailing stop loss
Let’s check out its importance with the help of an example, Suppose you open a long trade in Crude oil at 4730, set the stop loss rate as 4715 (15 points stop loss) and you expect a target of 4750. If the price rise to 4740 you can raise your stop loss to 4735 (subjective to the traders) to ensure 5 point profit. Thus, even if market goes in reverse direction than we expected you can squreoff your position with profit but not with loss. This is the way in which trailing stop loss will work.
Different methods to set stop loss
- Set stop loss based on the risk tolerance capacity of a trader
- Moving Average method for setting stop loss
- Support and Resistance method
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