The following are ten reasons why a stop loss is so crucial in trading:
- A stop loss tells you how much risk you have in a trade by telling you what price level you’ll end the trade at.
Stop loss helps to set trade size. It shows how mush money you can lose.
- You can then set the size of your position size based on your stop loss in order to figure out how much money you will lose.
- A stop loss helps define your trade size.
- Stop loss takes big losses out of your trading plan.
- A stop loss frees up money so that you can move on to make more money.
- You can save a lot of mental and emotional energy by getting out of a bad trade early. This is a good way to save money.
- The risk in your risk/reward ratio is set by your stop loss and the size of your trade. Without a stop loss, you can’t figure out how much risk and reward you’re taking.
- Putting a stop loss on a trade means that your downside risk is limited to a certain amount. This means that you don’t have to worry as much and risk going broke in one trade.
- When you make option plays, the option hedge part of the play is a stop loss.
- If a trader loses money, they have to admit they were wrong about the trade, which keeps their ego in check.