Stop loss is one of the three fundamental parts in trading ( the other two are take profit and entry). The subject of Stop Loss (SL) is very important and interesting to discuss thus this article! I would like to go over some of the advantages and disadvantages of using a stop loss as opposed to trading without one. I would love to hear your opinion on the subject below in the comment section – thank you!
So let’s begin:
First of all: An advantage for one trader could be a disadvantage for another one! Remember that, it is all strictly individual and you must find your way and what it works for you. There is no reason why two traders, one who uses SL and one who doesn’t, won’t make money at the same time.
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Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors. Such frequent trading and shorter holding periods can result in mistakes that can wipe out a new trader’s investing capital quickly. Here are the ten worst mistakes made by beginner traders:
1. Letting Losses Mount
One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. In addition to tying up trading capital for an inordinate period of time in a losing trade, such inaction may result in mounting losses and severe depletion of capital.
2. Failure to Implement Stop-Loss Orders
Stop-loss orders are crucial for trading success, and failure to implement them is one of the worst mistakes that can be made by a novice trader. Tight stop losses generally ensure that losses are capped before they become sizeable. While there is a risk that a stop order on long positions may be implemented at levels well below those specified if the security gaps lower, the benefits of such orders outweigh this risk. A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered because he or she believes that the security is getting to a point where it will reverse course imminently and enable the trade to still be successful.
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