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A stop loss is an order that automatically closes your position at a certain price. This allows the trader/investor to limit his losses or secure his profits. The Stop Loss Order can be placed in the negative and positive range. There are several possibilities for the Stop Loss Order, which we will explain in the following texts.
The stop loss (link Wikipedia) can be entered before the order is opened or after it. In general, a trader can set a stop loss for almost any financial product and thus limit his risk. The position is then automatically closed in the event of a loss. This has the advantage that the trader does not have to permanently observe the market. Trading is partly automated.
Securing profits with the stop loss
In addition to the take profit, the stop loss is also a good way to secure profits in the market. As an example, imagine you are already 500€ in profit with your trade. Now you want to hedge 300€ of the position. It is now possible to set the Stop Loss to the specified price and secure the order at 300€ profit. If the market touches your limit, the trade will be closed with 300€ profit.
Risk management: Where should I set a stop loss?
There is no single answer to this question. The trader must decide for himself how to set the stop loss. In general, the following factors apply to a stop loss:
- Type of risk management
- How much money do I want to risk with the order?
- Position size
- Market volatility
- trading strategy
Professionals recommend sensible risk management with a risk of 1 – 5% per position of the total account. This allows you to diversify your portfolio sufficiently and to absorb several losing trades in a row.
Why the Stop Loss is the most important tool of a trader
When trading on the stock exchange you should definitely use a stop loss. It is for your own safety. As a human being, you cannot watch prices 24 hours a day. A stop loss is particularly useful for long-term trading. This way you secure your position and protect your account balance from large losses.
In addition, with some financial products, there is an obligation to make additional contributions. The trading account can end up with a negative balance. However, the broker should usually stop you before this happens (margin call). However, a stop loss secures you twice over and gives your trading strategy a sense of purpose.
- Protects your account from enormous losses
- Secures profits
- Gives you more control over the portfolio
- Suitable for professional risk management
Tips & Tricks for setting Stop Loss
First of all, the trader should know where I would like to end my order in case of loss. There are, for example, certain marks in the chart or financial levels. The setting of your stop loss should be adapted to the trading strategy.
From my experience I know 2 methods in the market that are helpful for an intelligent stop loss re-trading:
- Tracking Stop Loss over highs and lows (suitable for long-term trading)
- Stop Loss after a certain price/candle (suitable for short-term trading)
As an experienced trader, I know exactly how difficult it is to consistently make profits. I have carried out many tests with the Stop Loss and have always come to a result:
“Don’t get caught up in a trading idea. Don’t have any expectations of the trade. Instead, secure the profit constantly with a stop loss. You have to trade ice-cold and see the profits. “Hope” will not get you further in the market. Often the trader has overachieving goals that are not met.”
Limit order or Sell/Buy stop
This section is particularly applicable to futures traders: there is a possibility to set your Stop Loss by Limit or Stop. We recommend using a Buy or Sell Stop. This means that the order is triggered as soon as the market triggers the price. The order becomes a market order and is not visible in the limit order book. When using a limit order, you must first wait for a buyer or seller to execute your order.
Conclusion: Stop Loss is one of the most important tools for a trader
No matter which asset you want to trade, stop loss is always one of the most important tools for the trader. It allows you to limit your risk of the trading position and also to secure profits. Without trading a stop loss is usually a suicide of the account.
Any kind of investment in the stock exchange is risky. Therefore, you should limit or reduce the risk as much as possible. Take a look at stop loss and your trading platform. Learn to adhere to sensible risk management. Stop Loss is the best tool to limit losses and maximize profits.