Why Do You Need to Set a Stop Loss?

Set A Stop Loss

It would be a stop-loss if I had to mention just one compulsory trading “tool” to be a successful trader. Without knowing how to set a stop loss, you shouldn’t even consider going into trading at all.

Markets, by default, are volatile; it is difficult to predict the rate at which the markets will go against your bias. Therefore, a stop loss is a defense to your trade, irrespective of whether you’re trading in short or long positions.

Interestingly, about everybody can benefit from this tool. Before looking at why you always need to have this tool in place in detail, Let’s examine the concept ‘‘Stop loss’’ extensively.

Are you contemplating setting stop-loss orders or unsure why you must set a stop-loss on your trades? This article is just for you! I have comprehensively explored the top 6 reasons you should never trade without setting a stop loss.

Top 5 Reasons Why You Need To Set A Stop Loss

1.      Helps Protect Against Excessive Losses

The primary aim of trading is to guard your capital, which is only possible in a measurable way by using the concept of stop losses. Stop loss is your guard against market volatility; uncertainty in the market cannot be avoided. Hence, the only way out is to guard your downside risk by setting proper stop-losses while trading.

If you’re not using stop-losses, it’s only a matter of time before a sizeable losing position gets out of control and will ultimately wipe out most of your trading returns and entire account! So, if you want to remain in the game in the long run and increase your trading account, you must use stop-loss orders in every trade you’re taking.

2.      Provides Automation

Stop loss in trading helps to automate your selling; hence you don’t have to be present in front of your trading screens at all times. In addition, stop loss is automatically executed, thus eliminating manual involvement each time a forex market price changes unpleasantly.

Furthermore, you don’t have to monitor the market’s daily performance regarding stop-loss orders. This ease is convenient when you are on holiday or in a situation that prevents you from viewing the forex market for an extended period. A stop-loss gets triggered automatically once the market reaches a particular price.

3.      Helps Maintain ‘‘Risk and Reward’’

You know how much capital you risk by measuring your prospective loss on stop loss on all your open trades. That instantly triggers if you must cut your positions to appropriately limit risk. Hence, stop-losses play a significant role in risk management.

Depending on the stop-loss, traders usually calculate what position size to take, how much they’re risking on any single dollar they’re making, how much money to risk on one trade, and many more. 

For instance, if you state that you will take just 2% or 5%, ‘the risk for making that much profit. Thus, a stop loss helps you to preserve your “risk and reward.”

4.      Offer Zero Cost

The most significant advantage of a stop-loss order is that it is easy to implement yet, costs nothing. However, once you reach the stop-loss price, your commission charges imply it is time to sell.

Your regular commission is charged only if the stop-loss price has been reached and is sold. One way to think of a stop-loss order is as a free insurance policy.

5.      Helps Promote Discipline

Stop-loss orders help protect your decision-making from emotional impacts. People tend to be carried away by the forex market or crypto fluctuations. For instance, they may keep the false belief that the market will come around if they give it another chance; this wait may trigger losses to mount. Hence, stopping loss instills trade discipline and avoids this emotional trigger.

It’s crucial to avoid emotional trading, which can lead to overtrading and blow up your trading account. Stop loss helps you stick to your strategy and promotes disciplined trading. This trading concept gives you a decent idea of your trade-off risk-return in each trade. This is only possible if you put your stop loss levels and profit targets well beforehand.

Final Thought on Why You Need to Set a Stop Loss

Interestingly, Stop-loss orders can be incorporated successfully in any trading strategy. As a result, it significantly affects your trading, risk management, and overall performance.

A stop-loss order is a simple tool that offers significant benefits if effectively used, particularly to avoid excessive losses or lock in profits.

Now over to you…Happy Trading!

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