The Pros and Cons of Using Stop Losses in Trading and Investing


by:  Ivan Cavric

A stop loss is a risk management tool that is commonly used by traders and investors to limit their potential losses on a trade or investment. The basic idea behind a stop loss is that it allows you to set a specific price at which your trade will be automatically closed, in order to prevent further losses. This can be a useful tool for managing risk, but it also has its pros and cons.

Pros:

  1. Risk management: A stop loss allows you to limit your potential losses on a trade, which can help you to manage your overall risk.

  2. Emotion control: By having a stop loss in place, it prevents emotions from driving your trading decisions. If you know that you have a set point where you'll get out of a trade, it's easier to stick to your plan.

  3. Time saver: Setting a stop loss in advance can save you time and effort since you don’t have to monitor the trade constantly.

Cons:

  1. Execution risk: In fast-moving markets, it's possible for your stop loss to be executed at a price that is significantly worse than the level you had intended.

  2. Slippage: Stop losses are not guaranteed to execute at the exact price you set, so it's possible that you may experience slippage, which is when you are filled at a worse price than your stop loss.

  3. Early exit: A stop loss may cause you to exit a trade too early, before it has had a chance to reach its full potential.

In conclusion, a stop loss is a valuable tool for managing risk and controlling emotions but it also has its downsides. It's important to use stop losses in conjunction with other risk management techniques and to carefully consider the potential pros and cons before using them.

Location: Welland, ON, Canada

Comments

Post a Comment

Popular posts from this blog

TEN REASONS TO START TRADING FOREX

Image
by:  Ivan Cavric More and more well informed investor and entrepreneurs are diversifying their traditional investments like stocks, bonds & commodities with foreign currency because of the following reasons: 1) FOREX is the largest financial market in the world. With a daily trading volume of over $1.5 trillion, the spot FOREX market can absorb trading sizes that dwarf the capacity of any other market. In fact, when compared with the $50 billion daily market for equities or the $30 billion futures market, it becomes quickly apparent this gives you, and millions of other FOREX traders, almost infinite trading liquidity and flexibility. 2) FOREX is a True 24-hour market. The FOREX Market never sleeps. Trading positions can be entered and exited at any moment around the globe, around the clock, 5.5 days a week. There is no waiting for an opening bell as in the case of trading stocks. It is a 24- hour, continuous electronic (ONLINE) currency exchange that never closes. This is very de
Read more

Currency Trading Tips For Beginners

Image
By:  Ivan Cavric Currency trading is a platform where individuals speculate on the exchange rate between two currencies. Traders buy and sell currencies hoping to realize a profit. In order to succeed in currency trading you will need a source of accurate and timely information. You'll need to familiarize yourself with a whole new language. When you start currency trading you'll learn what a market trend is and how it will affect your trading. Trends move up, down and sideways. There are also trend classifications within market trends. These classifications are intermediate, short-term and long-term trend. You'll learn how to look at and understand basic trend lines, which is the most valuable trading. You'll learn about channel lines and support levels. When you enter currency trading you'll be able to make sales online 24 hours a day, 7 days a week, unlike the Stock Market. Many online brokers offer commission free trading and you'll want to make sure that yo
Read more

“Gold, A Hedge Against The Perils Of Interesting Times”

Image
By:  Ivan Cavric While paper-based investments and real estate are vulnerable to effects of changing times, gold soars. A precious metals investment may save a portfolio when all else fails. The old Chinese curse, “may you live in interesting times”, has particular relevance to the current epoch of U.S. history. There’s a lot going on right now, much of it scary. Major investors around the world are responding to the events of our perilous age by sinking their dollars, deutschmarks and yen into gold, silver and palladium; Bill Gates, Warren Buffet , and billionaire speculator George Soros to name but a few. Big financial institutions like the Central Banks of Russia and China are also leaping onto the metals bandwagon driving the price of these precious commodities ever higher. This is spurring a gold rush not witnessed since the Misery Index years of the 1970s. Many financial experts now view gold in particular as an island of stability in a paper-based investment market growing stor
Read more