Let’s face it – the financial markets are difficult to predict. There are so many market forces that impact the direction of a position that it’s impossible to trade successfully 100% of the time. That means losses are bound to happen. If the Warren Buffetts of the world can pick losing trades, so can the rest of us. The goods news is that losses in the financial markets don’t have to be a bottomless pit. In the event that you find yourself on the wrong side of a trade, you should be able to limit your losses so that you don’t end up breaking the bank. That’s where the stop loss order comes into play.
Stop Loss: An Overview
If you’re a trader, the term “stop loss” should serve as a comforting reminder that there are tools in place that can help you protect your account. A stop loss order is essentially an order placed with a financial broker that automatically sells a security when it reaches a predetermined loss. As you can tell, a stop-loss order has the ability to limit a trader’s loss on a position.
Let’s say you bought gold futures at $1,200 an ounce and want to protect against a big decline. One of the best ways of doing so is to set a stop loss order at $1,190. This essentially tells the broker to automatically sell your position in the futures contract the moment its price hits $1,190.
As you can see, guaranteed stop-losses have a number of important advantages. They can help traders remove emotion from their investment decisions, prevent big losses at no extra cost and avoid spending the entire day glued to the computer screen monitoring their positions.
Stop Loss and Trading Psychology
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