Trading is a game, a zero-sum game. In this zero-sum game the gain of one trader is get equalized by an equal loss of other trader. The ‘gain’ of one man is the ‘pain’ of other man. To stay on the winning side of the market is every trader’s dream and passion. But no one can predict the trend of the market. Sometimes it may go up trend and other time it may be in the down trend so the profit or loss which we have to face is according to volatility of the market. That means we should move according to the trend of the market.
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 movement of 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’.
A trader direct the broker to sell or buy a security when it reaches a predetermined price value.The broker 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 place the order. 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.