Stop Losses Minimize Risk
Managing risk is something all traders have to do. A Stop Loss is the loss you’re willing to take if things go wrong. There’s no such thing as a trade that’s guaranteed to work out. RUN, don’t walk, from anyone who claims they can do this. Your Stop Loss is the key to saying: I will only lose a certain amount of money on this trade and no more. Set the trade and walk away.
Automate Your Risk
New traders everywhere place trades randomly, without a plan, and without much focus or thought. That is how and why they lose. Stop losses are one approach that can help. It can take years to truly master or understand.
A stop loss is a price level that defines the max amount of money you’re willing to lose. The key to this is understanding that not every trade works. People lose in markets, especially in trading. There is never a 100% guarantee of gains. So set a stop loss to control the max amount of money you can lose. If price hits that level, your broker will automatically execute the trade for you.
Three Steps To Creating A Stop Loss
Step 1 – Pick your buy price. What price do you want to buy at? This is called a Limit Order. You’re telling your broker I only want to buy if it hits this specific price. You’re basically saying: I will wait for this perfect entry and not chase.
Step 2 – Pick your exit price. This is your stop loss. Your stop loss defines the price that you will you sell at. Now you can walk away knowing you won’t lose everything. You’ve agreed to sell if the trade goes terribly wrong or not the way you thought. How much can you afford to lose on a single trade?
Step 3 – Remind yourself not all trades work out. You must have an exit plan. The market knows something you don’t or your trade was just a bad one. That happens! No one trades perfectly. Buy here, sell here, and take a profit here. These are the basics of planning a trade.
Rookie Traders Don’t Use Stop Losses
Most new and rookie traders buy without a plan. They have no idea what they’re doing, they chase price, and don’t think deeply about their next steps. Mastering your stop loss can prevent that. You will think a little more deeply about where you should place an entry buy price and more importantly an exit sell price.
By placing a sell price, you’re admitting the trade can go wrong and you will walk away with a small loss. That happens. And it’s way better to take a small loss than to lose everything.
Stop Loss Examples
“I’m Selling No Matter What Below $50 Per Share”
Pick a price level below your entry level and make that your stop loss.
“I Will Always Exit The Trade At A -5% Drawdown”
Use a systemized percentage drawdown to always exit a trade.
“On Every Trade I Set A Stop Loss Where Support Would Break”
Define levels of support and exit when price breaks that level.
Stop losses are how you define your risk, manage a real trade, and limit your exposure to loss. Most importantly, they help remove yourself from markets. Create the trade and walk away. Don’t stay glued to your screen, watching every trade, hoping for price to come back to your break even price.
I hope this guide helped you get started. Thanks for reading and following along.
Remember the steps
- Pick your entry price.
- Pick your exit price.
- Walk away.
I’ve worked in fintech for over 10 years. I trade and invest my own account. This is my blog where I try to help others learn, follow, and get better at markets.
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