Stop loss: what is it and how to use it

Stop loss: what is it and how to use it

Stop loss are a tool to control trading losses. You can lose with online trading, you have to remember it always. Even the best traders, those who can make millions, are not immune to losses because no one can control what the market does. Good trades are not afraid of losing money, simply using the best tools to control the risk. The best tool to control the risk of loss is called stop loss.

Using stop loss is absolutely necessary if you want to keep track of your losses. It is a simple tool but must be thoroughly understood.

A stop loss is the maximum level of loss that a trader is willing to accept. As you open a position on a trading platform, it is always advisable to fix the price level at which the platform automatically closes the position. It’s a really simple procedure, even for those who do not have much experience and so always recommend doing it.

stop-loss-chart-explainHow to set stop loss

The novice trader who has come to this point of the article is surely thinking that stop loss is a great idea (he is right) and has already figured out what the right loss threshold is willing to accept: 0. And here you are wrong.

The problem is that the price of an asset on the market varies continuously and so if you stop the loss to zero you seriously risk that your position is closed immediately because there is a small loss. In practice, if you set the stop loss at zero, many operations would be closed immediately. Online trading would be a waste of time. Most of the operations would be closed before they could generate profits.

It’s obvious that fixing an excessively large stop loss also has negative effects because the expected losses could be excessive. Fixing stop loss is an art that you learn with practice.

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