What is stop-loss?
As a trader, managing and preserving your capital should be your number one priority. Because once you lose all your capital, it’s game over.
Ideally, it would be great to keep the pips we make. But since we have no full control over market movements, we always don’t get that kind of scenario.
That also means there’s a chance we end up betting on the wrong side.
While being in a losing position can be unavoidable, you have power over what to do in such a situation. You can cut your losses and live to trade another day, or continue trading, hoping the market moves favorably.
If you’re a first-time trader, you’re better off cutting losses to stay in the trading game longer and learn more about it. But if you’re already experienced in this venture, having an exit plan is still as important.
This is where stop-loss orders can help.
A stop-loss order closes a position once the trade has reached a certain price level. It usually works as a market order, meaning it would take whatever price available once it reaches the price level you’ve set.
With a stop-loss order, you curb your risk on a trade. For example, you bought a stock at, let’s say, $30, and set your stop-loss order at $29.50. The stop-loss order will be executed once it hits $29.50, keeping you from incurring more losses.
But if the price never falls to $29.50, your stop-loss order won’t be carried out.
In setting stop-loss orders, it’s important that you do them strategically and based on trying out different methods.