A stop loss is a great way of knowing when it’s time to admit you’re wrong about a trade.
But how do you know where to set these stop levels? And can you use stop losses to protect your gains too?
Unless you have nerves of steel and are an extreme value investor like Warren Buffett, stop losses make perfect sense. They tell you when you’ve got it wrong and it’s time to get out of an investment.
A stop loss is a predetermined price at which you’ll sell an investment. By setting your stop loss, you know the maximum loss you could face. So, what level should you set your stop losses at?
A stop position is very important .A very tight stop loss can easily be triggered even when you choose the right direction. Too wide stop losses is like having none.
Stop losses should only be placed in a position that gets triggered only when the direction you have chosen is absolutely wrong.
There are no rules to regulate how to use stop losses. Deciding where to put these controls is a personal decision because each trader has a different risk tolerance.
Using stop losses to protect your profits
You can also tweak stop losses so you can protect a chunk of your profits too. In this case, they’re called trailing stop losses. There’s nothing worse than selling out too early when a trade continues to go in your favour.
In this case, you trail your stop loss to move in your favour. You can tighten the stop loss to protect your gains.
But most importantly during very volatile times, even the most liquid markets tend to gap. With a guaranteed stop loss, your position is closed at the price you set no matter what happens in the market.