What's the Importance of Using Stop-Loss Orders?

2023-06-05
Summary:

Stop-loss orders are vital for risk management for traders. In this article, there are a few tips to guide traders on how to execute stop-loss orders.

The importance of stop loss orders cannot be emphasized too many times. As W. D. Gann did in the 1930sThe era wrote that if you do not use a stop loss, the problem is not whether you will go bankrupt, but when. This is because the market is highly sensitive to external shocks, which can cause you to lose hundreds of points within an hour. These events are calledThe Black Swan event, as they seemed unimaginable before it occurred. But without the occurrence of the Black Swan incident, you can also suffer catastrophic losses.

suffer catastrophic losses

The use of foreign exchange leverage will expand losses. In the foreign exchange market, prices do not change linearly. Even strong trends have experienced multiple declines, and you never know when the decline will begin, whether it will be a small decline or a complete reversal.


The market may be irrational and completely wrong, but you need to remember that your trading purpose is not correctness, but making money. Both of these situations seem like rational thinking, but they are actually just excuses for letting emotions control trading. Another reason why some traders refuse to stop loss is that they will know your stop loss position and hunt for it. This is a famous hedge fund trader who has gone bankrupt twiceVictor NiederhofferProvide reasons. Indeed, due to his large position, he may become a hunting target. But he went bankrupt twice precisely because he did not use a stop loss and experienced sudden catastrophic losses. Which of the following is worse: being teased by a broker or going bankrupt? Undoubtedly, the purpose of brokers and others hunting for stop losses is to force you to leave, so that they can later buy at a lower price or sell at a higher price. But in reality, no one needs to know your exact stop loss position (except perhaps for particularly profiteering brokers).


The stop loss position is set at a limited reasonable technical level, including the support line and resistance line, the Bollinger line, and the Fibonacci line. Anyone with a chart can see where stop loss positions should be clustered. Refusing a stop loss order because others may have guessed your actions is a way of hurting oneself out of anger. In any specific situation, when the market decides to hunt long or short positions, the wise strategy is to leave the market. The main reason for using stop loss orders is to meet the demand for rational trading plans.


In an excellent trading plan, you already know the potential profit/loss ratio in advance. Don't spend all your last penny, as the market always has occasional surprises, but there is also some accuracy. For example, for every $1 loss, you would like to earn$2. The only way to achieve this goal is to make most of your real transactions achieve realistic profit targets, and the stop loss system limits losses to 50% of earningsBelow. Over time, such a plan will steadily accumulate capital.


The stop loss operation does have certain drawbacks. Firstly, the occurrence of unexpected events may lead to gaps or significant fluctuations, resulting in your stop loss order not being completed at the level you specified, but executed at a much lower level. Afterwards, when you exit with a stop loss, the price trend reverses and returns to its previous trajectory - but you have already exited. This must be awkward and annoying, but you have to accept this active trading fact. Complaining about temporary shocks causing you to stop losing and exit is like complaining that the house did not burn to a greater extent than the deductible after it caught fire.


Another disadvantage is that falling prices can cause you to frequently stop losing. This is not a problem with the tool, but with the operator. Frequent stop loss means that the stop loss position you set is incorrect, the currency of the transaction is incorrect, or the time period of the transaction is incorrect. If within an hour cycle, your stop loss position isAt 15 o'clock, but for many hours (after many days), the average range of high and low is 30 o'clock, so you are facing the risk of improper stop loss.


The use of stop loss orders is a very important risk management tool in futures and foreign exchange trading. The importance of using stop loss orders is as follows:

oneProtect position: When the market fluctuates, the price fluctuation may exceed investors' expectations. If no stop loss order is set, investors may suffer significant losses. After the stop loss order is set, when the market price reaches the stop loss point, the order will be automatically executed to protect the position from loss.


twoRisk control: When conducting futures or foreign exchange trading, risk control is very important. Using stop loss orders can help investors control risk and limit losses. At the same time, it can also avoid excessive losses caused by emotional decision-making.


threeAutomatic execution: After the stop loss order is set, investors do not need to pay close attention to the market situation all the time, just wait for the market price to reach the set stop loss point to automatically execute the trading operation. This can save time and effort, and better manage investment portfolios.


4. Flexible adjustment: According to market conditions and investment plans, investors can flexibly adjust the setting of stop loss orders to better adapt to market changes.


In summary, using stop loss orders is a very important risk management tool that can help investors control risk, protect positions, and better manage investment portfolios during market fluctuations.


【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.

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