Stop Loss yes or not?
The use of the stop loss in online trading is very important and also healthy for the trader and his trading account. However, not everyone perceives the stop loss as a positive element, but indeed many traders tend not to use it, facing very high, sometimes uncontrollable risks. We will try to pin down 7 reasons why the use of the stop loss is recommended and therefore 7 benefits for the trader and his trading account.
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1 – Control of risk and profits
It allows you to increase control of your risk and your profits. For example, you can set a maximum risk of 5% on the movement of the underlying or you can set a 50% risk of your profit already collected. It is a good rule to try to risk the profit made and not affect the initial capital. For example, if you have earned 1000 euros during a trading morning then, in the afternoon, you will have to evaluate stops no higher than your morning profit. The goal is always not to lose the money earned.
2 – Drawdown
It allows you to control your drawdown and keep it to a minimum, I hate drawdowns above 20% so I avoid it at all costs by planning my trades with well-placed stop losses.
3 – Money management
It allows you to have excellent money management. I’ll explain it.
If a position does not go according to my trading plan, it is better to accept the maximum predetermined loss. Because if you accept a loss of 100 euros, you know that you have another trading opportunity to recover them. If you do not accept the loss, this value could become -200 or even -1000 euros… and it will be much more difficult to recover it.
4 – Control of emotions
Stop loss is a method of controlling the trader’s emotions. When you are out of the trade you can be objective, less influenced by euphoria or fear, or the desire to recover. I have made many mistakes in the past, evaluating very large stop losses or even no stop losses. The result was bad. I had to work a lot on my mental training and to accept the stop loss as a cost of trading.
Today for my intraday trading I always use the stop loss to know what my maximum risk is. If a position goes wrong I will wait for another trading signal to allow me to recover.
5 – It is easier to recover losses if you use the stop loss
I didn’t believe it either … but that’s it. Accepting a loss is the fastest way to recover it later. Losing 100 today allows me to schedule a trade to recover that amount… try it for yourself.
6 – Risk Control for Day Traders
If you are a day trader and perhaps engaged in your work away from screens and prices, the stop loss is the only tool that allows you to remain in full control of the risk.
7 – Risk Reward 1: 2 or higher
If you use the stop loss you can implement trading strategies with risk rewards higher than 1: 2. With the risk-reward, you can use the statistic and probability in your favor. If you know how to run your winning trades you can also better manage your losing trades.
Questions or suggestions are welcome