The importance of stop loss orders will be revealed to new traders automatically. However, why should not read about it earlier?
Stop-loss is an order that automatically executes if the current open position reaches a certain price in a loss.
In a long position, the stop-loss order is put below the current price, and in a short position, above the current price.
Every trader, no matter if he/she trades stocks or currency pairs, wins and loses. The point is to manage your losses. And using the stop-loss order is one of the strategies to cut your losses.
It does not matter if you are a stock trader, a crypto trader, or a Forex trader; putting a stop-loss benefits you for the reasons you read in the following.
I wrote this article to reveal the importance of a stop loss order by explaining three reasons that may convince you to put always a stop loss order.
1. A Stop Loss Cuts Your Losses
If the trend continues in a direction that increases your profit, then congratulations.
However, what will you do if it goes against your will?
It is very likely to add to your position by thinking of compensation for losses if you do not put a stop-loss order.
When the direction goes against your open position, your emotions enter. You want to compensate and do not surrender to the trend.
I was one of those who were not putting a stop-loss. Instead of accepting my loss, I was adding to my position. This bad habit even emptied my account once.
2. You Can’t Predict How Long the Price Goes Against Your Open Position
You can be wrong if you trade against the trend or a new trend has started against your will.
And no one on the planet knows how long the current trend will continue, including the heads of central banks and the largest investment funds.
Thus, to manage your risk and cut possible losses, you must put a stop-loss order every time.
3. Not Putting Stop Loss Makes You Emotional
If the price continues in the direction that benefits you or increases your loss, not putting a stop loss order makes you emotional. In both cases, you will feel insecure.
A stop loss is a technique of risk management. If you do not manage your risk, it affects your emotions.
You become more emotional if the price goes against the direction that benefits you.
Moreover, putting a stop loss buys you some time to do other tasks, such as checking economic indicators or analyzing another chart.
Finally, if you want to control your emotions and master trading psychology read: Trading Psychology: 8 Tips to Become a Better Trader