10 reasons why you should not trade without a stop loss.
One of the most important aspects [variable] in forex trading that every trader should know about the benefits of using a stop loss. What is it? Why is it important? What is it used for? This article seeks to shed light on all those topics and more, in the form of a list. Listing 10 reasons why you should not trade without a stop loss and the underlying benefits of using one all the time.
But before we get into the many benefits of using a stop loss in your trading, we have to understand what is a stop loss to begin with.
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What is a stop loss?
A stop loss, just like a take profit is an exit level set by the trader (or expert advisor) that automatically closes the trade when the market price is the same price value as indicated by the stop loss.
A trader does not have the capabilities to be around the computer watching his open trades for hours manually, well at least not if he has a life to live. Hence at the time of opening, or after the open of a trade, the trader would set an appropriate stop loss that would automatically close the respective trade(s) that goes against his favor.
In other words, a stop loss is a market execution order that closes the bad trades early to avoid losing a big portion of the trading account.
Video: best place to put your stop loss
What is a stop loss used for?
As explained above, among the many benefits of using a stop loss, it is mainly used for the prevention of one bad trade from losing a big portion of your account balance. By utilizing a stop loss properly, a trader can prevent his account from being completely depleted of the initial deposits.
In layman terms, a stop loss is used to prevent risking the entirety of one’s trading account balance on one given trade. Thus increasing the longevity of his trading account.
That goes without saying that without a stop loss, your entire trading balance is at risk.
Why is a stop loss so important?
Until you’ve started trading for yourself, then you would not completely understand the benefits of using a stop loss. But to give an idea of how this simple yet effectively powerful technique can help elevate a [trader] trading strategy is used properly.
Anong the important benefits of using a stop loss are:
- It reduces risk/ cause smaller losses
- It automatically closes your trades for you while being away from the screen/ charts
- Stop loss tells the lot size to use in accordance with risk management
- Stop loss is the mechanism within risk management that indicates/ controls the risk per trade
- Stop loss plays a big part in risk management
- Stop loss is more important than take profit
- Can use stop loss to break even
- Can use stop loss to lock in profit
- Stop loss helps with controlling emotions
- Stop loss is useful in managing trades
10 reasons why you should always use a stop loss while trading
1. It reduces risk/ cause smaller losses
This is probably one of the most important benefits of using a stop loss. Without a stop loss in play or some form of mechanism to close your bad trade(s) early, then you are leaving your entire trading account at risk. This means, that any bad trades can run further into loss until the trading account is blown or gets margin called.
In forex trading, you would want to keep your losses small at all times, and the best way to do that is to implement a stop loss at a good place so that you can keep your account balance risk at a minimum.
2. It automatically closes your trades for you while being away from the screen/ charts
It is not practically possible nor is it healthy to always be watching your pc/mobile screen to know when to close a trade. Sometimes, you would even end up closing a trade too early or late, but while using a stop loss, all those problems are solved automatically.
3. Stop loss tells the lot size to use in accordance with risk management
Within your risk management strategy, a stop loss is used to calculate the lot size based on the account balance and the risk per trade that is used. So as the account balance increase, the lot size increase as well, vice versa, as the account balance decrease, the lot size decrease accordingly.
4. Stop loss is the mechanism within risk management that indicates/ controls the risk per trade
As mention above and in the previous point, among the many benefits of using a stop loss, it is used in relation to the risk per given trade.
5. Stop loss plays a big part in risk management
Since stop loss influences the risk per trade, it is one of the biggest components in forex risk management.
6. Stop loss is more important than take profit
One can trade without take profit, however, a trader should not trade without a stop loss. This is because the deeper in profit a trade runs, the better. But the deeper a trade run in a loss, the more detrimental it becomes that particular trade becomes.
7. Can use stop loss to break even
The difference between putting your stop loss at the entry point vs putting your take profit is that the stop loss can at that point prevents you from losing any money. That’s because ideally, the trade must be in profit for the stop loss to put at break even. Doing so causes the trade to close either with no loss or with profit.
While on the other hand, the trade must be in drawdown (running in loss) for the take profit to move to the entry point. By doing this, the trade either closes with no loss or closes with a loss.
8. Can use stop loss to lock in profit
In addition to the previous benefits of using a stop loss, it can move above/ below the entry point to ensure profit. This means that regardless of the direction of the market, you are guaranteed to make money.
9. Stop loss helps with controlling emotions
One way that can help a trader controls his emotion is by using a stop loss. Fear of blowing a trading account can overwhelm a trader causing him to close trades prematurely. However, once a stop loss is in play, he can ensure that the loss will be within an acceptable range that can be easily recovered.
10. Stop loss is useful in managing trades
Controlling your emotions, break even your trades, lock in profit so they can become risk-free is all part of managing your trades properly. As explained above, using a stop loss is one of the best ways to achieve all of the above, hence using a stop loss is a great way of managing your open trades.
Additionally to the benefits of using a static stop loss, knowing how to use a dynamic stop loss, ie: trailing stop, can increase one’s profit margin.
Furthermore, you can read more about the benefits of using a stop loss at investopedia.com