Stop loss, what is it?
Todays post will be about what is stop loss and its concept. When working on the exchange, any trader is faced with some basic concepts that are most often encountered, regardless of the type of exchange trading (stocks, forex).
One of these concepts is a Stop loss order or, in Russian, an order to limit losses. The main purpose of this technique is to enable the trader to limit possible losses in advance, when opening a buy or sell position, if the price movement was not determined correctly. At the same time, an open order is closed by the system forcibly when a certain level of unprofitability set by the trader is reached.
The most understandable principle of the stop loss and its necessity was explained by one of the leading and legendary analysts and researchers of exchange trading, Bill Williams, who turned all the theories of exchange analysis that existed before him and created the famous theory of trading chaos.
The essence of this explanation boils down to comparing a stock trader with a competent and experienced driver who keeps his car in perfect working order and moves in compliance with all traffic rules. At the same time, such a driver is not at all guaranteed that any other road user will crash into him through no fault of his own, which can lead to a significant accident and damage to health and losses of our positive hero.
This situation can happen more than once. It is for such situations that airbags are provided in the design of the car, which do not guarantee the absence of losses and the preservation of life and health, but can significantly reduce their consequences. Stop loss order is just such an airbag in exchange trading. At the same time, fixing losses in this case allows the trader to avoid more significant losses or the loss of all capital.
Stop loss when opening an order (buy) is fixed below the position opened by the trader in order to stop losses if the price falls, not rises. Stop loss for a sell order (sell) is placed above the open position in case the price rises, not falls.
One of the first and main tasks of a trader when using this technique is to determine the level of acceptable loss, after which the order is forced to close. An error on the part of the trader when determining this level can lead to significant losses.
Should I use stop loss
Among theorists and practitioners of exchange trading, there is no consensus on the correctness and necessity of using a stop loss order when conducting transactions. Some of these experts are calling for a complete abandonment of this practice, offering alternative options to replace the stop loss.
One such alternative is the ability to set a "lock" (lock). The main idea of this technique is to open a pending order "buy stop" when opening a sell order (sell) and a pending order "sell stop" when opening a buy order (buy).
In this case, the above-mentioned pending orders act as the so-called "airbag". At the same time, it is possible to avoid the forced closing of positions associated with the onset of a pre-fixed event and the trader is given the opportunity to further show his creative abilities in correctly determining the trading strategy.
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