Generating profits is the top agenda in trading. You deposit money in your account, hoping that you can grow that money. If you lose trades, you will try your best to get back the money that you lost. So, once you win trades, you would want to keep being profitable. However, as we know it, the market will always be unpredictable. We can use technical analysis and look at charts to get an idea about our next trade. There are also ways to get updates about fundamental factors such as economic news, press releases, and events. However, some can be very sudden. For example, COVID-19 left everybody hanging. No one knew it would come and become this big, but it did, and it made a massive impact on many things like employment, businesses, and the forex market.
So, no matter how careful and alert we are, there is always a chance of losing a trade. We might not control unforeseeable events that put us on the losing side of the trade, but we can control how much we are willing to lose. We can stop these events from wiping out our account.
What are stop losses?
Among all the tools a trader can use, we can consider stop loss as one of the most important ones in trade management. As its name suggests, a stop loss is a tool that should stop the losses from coming any further. Having a stop loss allows you to have peace of mind knowing that a losing trade does not have to mean that you should lose everything. Also, it will enable you to hop on to the following opportunities that you may come across. Technically, stop losses enter the picture when the losses hit the specific level of losses that you set.
Why is a stop loss significant?
As we have mentioned, a stop loss prevents the losses from becoming more significant than they already are. For instance, you and your spouse have the same trading strategy. However, the only thing that you two disagreed with is the stop-loss size that you want to use. So, you used 3% of your account balance as your stop loss size while your spouse was more fearless to use 8% of his account balance.
The stop loss will automatically help you exit a trade once the stop loss or the profit target gets hit. Let us assume that both of you, unfortunately, did not win even after 12 consecutive trades. You have lost at least 36% of your account, but you still have 64% capital. On the other hand, your spouse’s account is barely there, with only 4% left. Now we realize that a stop loss is essential, so is the percent that you set.
Losing is part of life and trading.
Sometimes, losing is not just all about losing alone. Sometimes, it can also be about learning from our mistakes to become a more experienced and profitable trader. Losing is a part of becoming successful. However, we should take extra measures to protect our capital.