What is Stop Loss Trading?
When you start trading, you will come across the new term, one of which is “Stop-loss” or “Stop orders”. In simple terms, Stop-Loss is an automatic order to buy or sell an instrument once its price reaches a specified level, usually known as ‘the Stop Price’. The order is executed automatically, which saves you having to monitor the deals regularly. Also, it serves as protection from excessive losses.
Advantages and Disadvantages of Stop Loss orders
Stop loss orders is extremely important tools for traders. Global markets operate the day and night, making it virtually impossible for a single trader to follow multiple deals in a variety of shares, commodities, currencies and indices. Some instruments are very volatile and can experience huge price changes in a matter of hours, or even minutes. Stop Loss orders offer a simplistic solution to investors need to carefully monitor changes and help to protect the trader’s balance.
However, the professional traders understand the stop-loss orders are not a perfect solution. It should be used carefully because they can limit potential profits by effectively closing the deal too soon.
Advantage of Stop Loss trading
- Offer protection from excessive losses.
- It enables better control of your account.
- Helps to monitor multiple deals
- Executed automatically at any time.
- Easy to implement and allows you to decide what amount you are willing to risk.
Disadvantages of Stop Loss Trading
- Result in deals closing too soon, hence limiting profit potential.
- Traders need to decide which rate to set and which could be tricky.
“Take Profit” in Stop Loss Orders
Take profit order allows investors to set a profit limit, in which it deals closes automatically, once the price of instrument reaches the specified rate.
It allows for better control over the account, management of the multiple deals and lack of profits once the price of an instrument reaches the specific level.
It also has the same disadvantage that it limits potential profits, so it should be used carefully.
Watch the below Video for Understanding the Concept of Stop Loss and Take Profit Orders in Trading
How to Set Up the Stop Loss Order
It is very easy to set a Stop loss order. When you open a deal, you will see an option of Add Stop-Loss. Then choose an amount or set an exact rate (the rate at which the deal will automatically close). Also, you can choose to add a take profit order.
The real challenge with the Stop Loss Trading (with Taking Profit) is figuring out which rate to set, but with a bit of practice, you discover these automatic orders become extremely useful.
Click on below Video for better Understanding of How to Use a Stop Loss Order When Trading
Using Stop Loss and Take Profit orders, you can gain better control over the deals and funds, and can both minimize risks and maximize the profit potential.