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Why is a Stop Loss Important?

If you went back and removed your biggest losses over the past few months or years what would your trading results look like? The roots of my own big losses were based on emotions and ego, not a market event. A big loss is almost always caused by being on the wrong end of a trend and then staying there, and this is why it is necessary to use a stop loss when trading. (SL = Stop Loss)

In 2020, I made a ton of money trading; it was super easy to trade throughout that year because of the amount of money being printed by the fed and a barrage of new programs to help keep the market functioning.

In 2021, I took some significant losses and that’s because of my successes in 2020. I got way in over my head and let my ego and emotions get to me and took a big loss in 2021. Now if I am going to bet big on something I will only trade with an SL, to avoid loss of all capital.

What is an SL order?

A stop loss is meant to do exactly what it says, stop your loss. A stop-loss sets the predetermined risk for your trade-in monetary terms. You know at what price level you are getting out when you get in. An SL is your quantified price risk level that will tell you that you’re wrong if your trade goes that far against you.

A stop-loss order is placed with a broker to sell a specific stock once the stock reaches a certain price or percentage.

Suppose you just purchased $AAPL at $170 per share. Right after buying the stock, you enter a stop-loss order at $150. If the stock falls below $150, your shares will then be sold at the market price you set the stop loss at, which was $150.

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Where to Place an SL

A common method to use when placing a stop loss is 10% below your trade entry. There’s also the support method which involves hard stops at a set price. This method may be a little harder to practice.

I prefer the support method because I like placing my stop losses right below the stock’s all-time low.

Trailing SL

A trailing stop loss is a great tool for locking in profits on a winning trade. A trailing stop is a strategy that moves the exit point for trade as the price moves in the right direction to increase profits. It is also known as a profit-protecting stop because its job is to protect your profit from going back to zero.

The main difference between a regular stop loss and a trailing stop is that the trailing stop moves as the price moves.

For every 10 cents that the stock price moves, the trailing stop would also move every 10 cents.

A great way to implement a trailing SL in trading is by having it trail the 20-day moving average. Once the stock your trading breaks the 20-day moving average it is a good indicator that the trend of a stock is broken and it’s now time to take profits.

Categories: Financial Advice

Bodhi G.

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