When you start trading online, the goal is to make as much money as possible. At the same time, there is also a fear of losing money. To achieve these inseparable objectives, different strategies must be put in place. In particular, it is wise to adopt Stop Loss, a strategy to limit losses… How does it work?
The Stop Loss
Stop Loss (or Stop Order or Trigger Limit Order) is a tool dedicated to online trading enthusiasts. As its name suggests, it is used to stop losses. Each trader can then set this instrument as he wishes: he decides the limit of losses he is willing to bear in relation to his capital. When adopting Stop Loss, this tool should not be considered as an obstacle to the trader’s development. On the contrary, it is an excellent way to protect capital, especially when you tend to let yourself be carried away by emotions.
Place a Stop Order
A Stop order is placed to protect against a possible decline in the value of an asset (whether shares or other financial securities). With Stop Loss, the trader can define the maximum amount he is willing to lose in the event that trends do not change in his favour.
In practice, when such an order is placed, an asset is automatically bought or sold when its value has reached a certain limit. In this way, the risk of loss is reduced. Stop Loss is mainly found in Forex on all traders such as NessFX or eToro for example. The Stop order starts to appear in binary options with brokers like OptionWeb.
How to use the Stop order correctly?
But how then to place this type of order properly and take full advantage of its advantages? It is important to take into account different parameters to make the most of it. First, the volatility of the asset must be taken into consideration. If the latter fluctuates a lot, it is necessary to choose a level far enough from the current price to avoid the Stop order being triggered too quickly.
It is also wise to keep in mind investment and performance objectives. Thus, for example, if a 25% gain is expected over a 6-month period, a Stop order should not be placed at a 3% loss: over 6 months, there is still plenty of time to reach the target. However, the Stop Loss would be triggered quite quickly. Finally, it is also wise to carefully observe the evolution of the assets in which you are interested. The objective is to analyze their resistance as well as their support. It is then recommended to place a Stop Loss instead underneath a large support.
In short, Stop Loss avoids the trader having to monitor the way his assets evolve on a daily basis. This is particularly interesting if you are unable to access the online trading account. If you are new to online trading, feel free to use the Stop order on highly volatile assets to limit your risks and why not start with eToro by observing the best traders?