Stop loss order

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What you understand by stop loss order in trading?

[Designed from canva]

A stop loss order is an order placed in trading to help manage the risk on a particular position in order to reduce the possible loses. A stop-loss order works in a way that it draws a line at a certain price below which a security is sold depending on a predetermined level of loss.et me say for example, if an investor has bought a share at $50, they set a stop loss order of $45; in such a case, when the price comes down to $45, the share is sold and the maximum loss is $5 per share.

Using stop orders are useful for avoiding losses that are caused by surges in the market, or a trader who is tired of trading and is likely to make irrational decisions and through a stop loss order, traders have the freedom of determining their level of exposure to risk and avoid cases whereby the market turns against them. It has turned out to be essential when it comes to risk management so as to ensure that the traders are able to contain themselves and follow the set down strategies.

What is the importance of stop loss order while trading?

Stop loss order is another technique employed by traders in order to prevent maximum possible losses on a trade; this is in the sense of the trader setting a price below which the security will be sold so the need to incorporate placing of stop loss orders in trading cannot be overemphasized because they make sure the trader’s capital is safe, guard against risk and ensure the trader adheres to discipline in the conduct of the trading business.

[Designed from canva]

Firstly, stop-loss orders assist the traders in avoiding their capital from being blown by placing a restriction on the loss that is allowed on a particular trade, A stop-loss order fixes a safety level below which the trader cannot lose more and this is effective in case the market begins moving in the opposite direction of the traders perception and this is especially important in the volatile markets where prices of securities may go up or down in very short period of time and this may result in great losses if the situation is not well controlled.

And secondly, stop loss orders help the trader to control the risks better , using the amount of loss they are willing to let the market take away from them on a trade, traders are able to determine the risk-reward of a trade before getting in the position so this enables the trader to market his or her stock in accordance to the trader’s risk taking appetite and market trading plan hope you all understand my post.

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