When it comes to trading in the markets, stop-loss orders are essential tools that help traders manage risk and protect their capital. While they can be a great way to limit losses, they must be used correctly in order for them to work effectively.
The name of the game is to follow your trading strategy. This means sticking to your stops. If price action has met your stop, your trade is invalid. It’s that simple. Accept it and move on to the next trade. Having a “mental stop” — having a price in your head where you will decide you’ll get out — opens the door to mistakes and bending of your rules. Use that limit order to create your stops.
Here are three key best practices you should consider when using stop-loss orders:
Never under any circumstances should you widen your stop.
By widening your stop, you increase the risk of a bigger loss if the market moves against you, so it should be avoided. If the trade idea was invalidated by your stop-loss, then that’s it. Move on to the next one.
Your emotions should NOT be your guide when it comes to moving your stop-loss order.
It can be tempting to adjust a stop-loss order because you are upset that the market isn’t moving in your favor, but this should always be avoided. Doing so will only increase the risk of a greater loss if the market suddenly moves against you after you make the adjustment. Your stop should be predetermined by your trading plan and you should not vary from it.
Consider a trailing stop.
This is a great way to ensure that you stay in a trade for as long as possible and maximize your gains. Trailing stops can be adjusted as the market moves, allowing you to protect profits while still giving the potential of making more money if the market continues to move in your favor.
Many brokers offer a trailing stop. This is how you lock in profits. As the trade moves in your direction, so does your trailing stop.
By following these three rules, traders can use stop-loss orders to control risk and maximize profits. While stop losses can provide peace of mind for traders, they must be used with caution in order for them to work effectively. The key is to remain patient and disciplined when making your trades and follow the best practices outlined above. With a bit of practice and dedication, you can use stop-loss orders to protect your capital and ensure consistent profits in the markets.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.