Stop-loss is an essential tool for traders, helping to limit potential losses in the event of an adverse market movement.
What is a stop-loss?
It is an order you place with your broker, indicating at what exact price you want to sell an asset if its price falls. In other words, it is like putting a safety net for your investment.
Why use a stop-loss?
* Limit Losses: If the market moves against you, your stop-loss is automatically triggered, preventing you from incurring significant losses.
* Manage emotions: By eliminating the temptation to "hold on" in the hope of a reversal, stop-loss allows you to trade in a more disciplined manner.
* Protect your capital: It preserves your capital for future opportunities.
How does a stop-loss work?
* You buy an asset: For example, you buy 100 shares of company XYZ at €50 per share.
* You set your stop-loss: You decide that if the price falls below €45, you want to sell automatically.
* The price falls: If the price of XYZ falls below €45, your stop-loss order is executed and your 100 shares are sold.
Types de stop-loss
There are different types of stop-loss, each with its own characteristics:
* Fixed stop-loss: The sale price is fixed in advance.
* Stop-loss in percentage: The sale price is calculated as a percentage of the purchase price.
* Trailing stop-loss: The stop-loss level follows the price of the asset, automatically adjusting its level.
When to use a stop-loss?
* On every trade: To proactively manage risk.
* During volatile markets: To protect your position in case of sudden movements.
* When you are away: To avoid suffering significant losses in your absence.
Important:
* Place your stop-loss at a realistic level: A stop-loss that is too tight can be triggered by simple market fluctuations, while a stop-loss that is too wide may not provide enough protection.
* Adjust your stop-loss regularly: Market conditions are constantly changing, so it is important to adjust your stop-loss as the situation changes.
In summary, stop-loss is an essential tool for any trader wishing to control their risk. By using it judiciously, you can protect your capital and increase your chances of long-term success.
