The Importance of Using a Stop Loss

It’s time to learn The Importance of Using a Stop Loss.

The Importance of Using a Stop Loss n trading is the equivalent to having seat belts and airbags in your car. They are extremely essential to everyone and should always be used. The Importance of Using a Stop Loss cannot be stressed enough, but I will try my best with this article. A stop loss is an order you place when you open a trade that represents when that trade is a loser. It is the point in time where your trade no longer looks valid and should be closed for a controlled loss. Not all trades will be winners (in many cases, most of your trades will be losers), and we need to ensure the losses we do suffer are minimized as much as possible.

The Importance of Using a Stop Loss: Key to Every Trade

A stop loss is the most important element of any trade you every place. It is the protection we have from the markets taking all our money and leaving us high and dry. Preservation of capital is the name of the game in trading- if you don’t have any money left to trade then it is all over. This is the reason it is mandatory to have a stop loss in place for every trade you ever make.

The Importance of Using a Stop Loss: Where to place

Aside from it being mandatory to have a stop loss, it is also mandatory to have established where our stop loss will go prior to entering a trade. Before you enter a trade, you are not emotionally attached to the idea of the trade at all and that is exactly when you need to identify where you will place your stop loss. If you enter a trade, then place the stop loss, your emotions will take over and you will get crushed repeatedly. Once the trade is open you have money on the line and fear and greed take over. You start to worry about winning and losing and the emotional effects tied to them, and you WILL make poor decisions.

The Importance of Using a Stop Loss: Never Widen

Another very critical aspect of stop losses are that they must not EVER be widened. Adjusting your stop loss to protect you with a winning trade is totally normal and should be done. But you should never ever move a stop loss further from your entry once you are live in a trade. This will almost certainly ensure your demise.

Though there are many different methods and reasons behind where to place your stop loss, there is one rule that should rain true to all traders. Your stop loss must be placed where your analysis of the trade is WRONG, nothing else. Do not base your stop loss on the amount of money you would lose if the trade went against you. This is one of the biggest thing’s traders get wrong when it comes to setting stop losses. A position size calculator must be used for every trade you ever place.  If you are not sure what a position size calculator is, or how to use it, click this link.

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