"Stop Loss"
By:
Iftekhar (Ifty) Khan
On
10/03/2024Reading time:
1 min
Summary:
A stop-loss order is a common tool used in trading financial markets to manage risk. It is an instruction given to a broker to close the trade when it reaches a pre-determined price. When a stop-loss order is triggered, it helps an investor to limit their loss on a position by automatically closing out their position when the market moves against them.
Stop Loss
A stop-loss order is a common tool used in trading financial markets to manage risk. It is an instruction given to a broker to close a security when it reaches a pre-determined price. When a stop-loss order is triggered, it helps an investor limit their loss on a position by automatically closing out their position when the market moves against them.
Stop-loss orders can be useful in preventing emotional decision-making that could lead to further losses. By setting a stop-loss order, investors can plan ahead for the maximum amount they are willing to lose on a trade and can take a disciplined approach to exiting a position if the trade is not working out as expected. For instance, an investor who sets a stop-loss order for 10% below or above in the instance of a short trade, the purchase price of a stock would limit their potential loss to 10%.
Risk management is a key concept in trading financial markets, and stop-loss orders are one tool used to manage risk. In addition to stop-loss orders, investors may use other risk management tools such as diversification, position sizing, and setting profit targets. The goal of risk management is to manage potential losses while still seeking to achieve profits. By combining various risk management strategies, traders can develop a well-rounded approach to managing their portfolio and achieving their financial goals.