If you are trading shares online and you are not using a stop loss on each and every trade then you are exposing yourself to a lot of risk. Not only does it provide a safety net but it provides you with a level of security that we all need as traders. Trading is stressful. There are so many variables and so many things that can go "wrong" that we really need to use and utilize every bit of protection we can.
A stop loss is a very simple concept and its basically a "sell order" that automatically gets executed when the stock reaches a certain pre determined price (that you set). Why is this useful? Lets quickly look at 3 reasons why you absolutely have to use it.
1. Limit Losses
As the name implies (rather directly) that it stops potential loss. No one can afford to monitor all their stocks all the time. When a particular one crashes and starts falling rapidly you can lose a lot of money quite quickly. The stop loss however can prevent this by automatically selling when it falls to a certain level thereby limiting your loss.
2. Protects Your Principal
Your principal or your capital is the one thing you need to treat with the utmost respect as a trader. Losing small amounts across multiple trades can quickly add up. Using a stop loss can help you to protect your principal and give you peace of mind that "the sky won't fall". This will prevent you from waking up to find your trading account wiped out overnight.
3. Good trading practice
Good traders are very disciplined. You need to have your own set of rules that you live by. If you are just blindly trading without any rules or structure then you are doomed to fail. Working with stop losses should be part of your overall strategy and your overall approach.
While there is an argument that a stop loss can cut you out of potential profit the reality is that you need to work within your own tolerances for risk. Some people set it at 5% below the buying point while a more realistic number is probably 10%. It all depends on your aversion to risk. You might want to look into trailing stop losses as many online brokers now offer that as an option.
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