Darren Winters points out that you will be hard-pushed to find a professional trader who does not use stop losses.
Short-term investing or trading is a risky activity with a high mortality rate. A high percentage, 80% of would-be traders fail in the long run, wash out and turn to other activities.
But those traders who succeed use risk management tools, the first rule being that stop losses, stop losses.
The stop loss can be a trader’s best friend in preventing an account blowup or losing your money when trading.
What is a stop loss?
A stop loss entails a trader deciding a predetermined price level where the trade, or position, will be closed if the market moves against the trade.
The stop loss is a risk management tool used to limit potential losses and protect the trader’s capital.
Stop losses, stop losses, and there are various types.
Several types of stop losses are available and vary according to the tolerance to risks that the trader has.
Fixed loss versus trailing losses
A fixed stop loss is a predetermined price level, which is set by the trader to exit the trade if the market moves against them.
Fixed stop losses differ from trailing stop losses in that, in the latter case, stop-loss moves with the market as the trade becomes more profitable.
A guaranteed stop loss is a type of stop loss that guarantees to close the trade at a specific level, regardless of market conditions.
Stop losses stop losses; key points about the types of stop losses
Fixed stop loss is a predetermined level at which the trader decides to exit a trade if the market moves against them.
The exit price will be set, according to the trader’s risk tolerance.
Darren Winters explains that the challenge is to set the stop loss not too close to the entry price, which could result in premature exits and missed opportunities, while setting it too far away may result in excessive losses.
Traders will use a combination of fundamental and technical analyses to gauge the optimum fixed stop loss price level.
Trailing stop loss is a dynamic stop loss that moves with the market as the trade becomes profitable.
Traders use trailing stop loss to lock in profits and minimize losses in a trending market.
Trailing stop loss requires regular monitoring of the market conditions, and aids traders in maximizing profits while minimizing losses, but it does not guarantee that a trader will not lose money.
Guaranteed stop losses guarantee to close a trade at a specified level regardless of market conditions and are given by brokers for a fee. But don’t be surprised if your broker refuses to offer guaranteed stop losses in fast or highly volatile market conditions.
Stop losses, stop losses, which type?
The type of stop losses used, fixed, trailing, or guaranteed based primarily on the trader’s risk tolerance and market analysis.
Stop losses are the go-to risk management tool in forex trading, as they help traders manage their risk exposure and minimize the impact of unexpected market movements.
Stop losses are no guarantee that a trader will not lose his capital in the long term, but they are an effective tool to control risk and limit potential losses leading to an account blow-up.
Traders often use fixed stop losses to limit their potential losses on a trade, and trailing stop losses to protect their profits and minimize losses in a trending market.
Traders could opt to use guaranteed stop losses to protect their trades from slippage and gapping, which can occur during volatile market conditions. Guaranteed stop losses guarantee to close the trade at a specific level, regardless of market conditions.
Stop losses, stop losses, but are there any professional traders that do not use stop losses?
“It’s not whether you’re right or wrong that matters, but how much money you make when you’re right and how much you lose when you’re wrong.” George Soros.
Geoge Soros sits in the billionaire trading club, and he is the most successful and profitable currency speculator alive today.
So, from the above quote, we can deduce that Soros uses a risk management tool, stop losses, to limit the losses on his trade when the market moves against his position.
Paul Tudor Jones is another billionaire trader who never averages down on a losing bet. So, if a trade goes against him, he does not add more capital to it so as to recover losses. Instead, Paul Tudor Jones cuts his losses and moves on.
Paul Tudor Jones’s trading strategy implies that he uses stop losses to manage the downside of his positions.
Pierre Andurand, the famous commodity trader, is as disciplined about locking in profits as he is about cutting losses.
Pierre Andurand also uses some predetermined price to exit losing positions.
An interesting point to note is that these heavy-weight billionaire traders keep their predetermined stop losses price level close to their chest like a poker player keeps his cards hidden from his rival players.
Stop losses, stop losses and are used by the most profitable professional traders.
These top traders might not input a predetermined stop-loss price in their broker’s account, but you can bet they have a mental stop loss in their heads.
If you are a trader, stop losses, stop losses and the risk management tool gives you a chance to reflect on your trading strategy if you have a string of bad trades without blowing up your accounting.