How can stop loss improve your trading returns?

Even the most profitable trades can result in terrible losses for most of the stock traders.

Trading is all fun and beneficial until one starts making losses due to the ever-changing market conditions. Hence all traders must keep an eye on their earnings before they hit a loss. Most of the time traders miss out on watching their potential loss as they focus more on profit earning. The only powerful tool that is so underrated yet useful is the stop-loss tool. This tool comes as a rescue to limit your risk and manage your hard-earned gains before a loss occurs. 

What’s a stop-loss order?

Stop loss is an order placed with a broker to purchase or sell a particular stock automatically when the price falls. The stock price is set up in advance so that when the price falls stop loss can immediately sell it out. Thereby saving the traders from making losses. This tool works as a safety net, protecting traders from potential losses that can ruin their portfolios. 

How does stop loss work?

Stop loss is a tool that automatically triggers the sale of a stock when it hits the set price. The trader specifies a price at which he wants to sell off his stock so that he doesn’t make extra losses. The stop loss order sells the stock when the determined loss occurs. And eventually, the traders don’t make excessive losses thereby protecting their capital. 

How stop loss orders can improve returns? 

The traders need to consider several factors while putting their money into the stocks. Stop loss tool can surely improve your returns if you use it at the right time. Stop loss has the following advantages that can improve your returns:

Better Risk Management: 

Traders can improve their returns with effective risk management implementation. By placing a stop loss the trader sets a limit to the amount of losses he is willing to bear. This way the traders are less influenced by emotions and they follow their set strategies. Stop loss is a beneficial tool for managing your potential risk in the volatile market. 

Capital Protection:

When the losses are limited, the traders get better growth opportunities. For instance, if you have two trades running simultaneously. Where one is slightly profitable and the other one is incurring losses. Stop loss tool helps to control the excessive loss, by using the capital into profitable trade. 

Reduce losses:

Traders can maximize their returns by using stop-loss orders regularly. Through this traders can protect their capital investment. And also safeguard themselves from experiencing heavy trade losses. What’s better than reducing your losses while trading in the stock market? Try to stop-loss orders to maximize your income. 

Better Trading Performance:

Traders can improve their performance by limiting their losses and capitalizing their profits. Even a small limit to a loss can boost our substantial profits. This way their overall performance improves giving better results. Your protected capital can be used effectively for a winning strategy, thereby making way for better gains. 

Drawbacks of using stop loss order:

Stop loss is the most effective tool to control your losses but it also comes with some disadvantages:

Fluctuating market:

The major drawback of using stop loss is that it can be affected by even slight changes in the market. The stock market is volatile and can easily be influenced by price changes. The stop loss price may not be the price where it was placed. A temporary price fall can end up as an early exit that means premature selling of stock. Therefore we can say that fluctuating market conditions can affect stop loss.

No fixed rule: 

For placing a stop loss order there is no fixed rule, the investor is free to take any call regarding fixing stop loss. This is the major drawback that there is no basis or guidance for investors. Hence finding the right stop loss level is an art, and the trader has to make smart decisions. To preserve capital and limit their losses. The trader has to set his own set of rules for the stop-loss tool.

Expensive:

The process of placing a stop-loss order can be costly. Most of the time the broker may charge heavy fees for stop-loss orders. This technique may be expensive as using stop loss can trigger frequent trading practices. This increases the amount of money invested and it may also add up additional fees making it costly. 

Concluding remark:

Stop loss orders are an effective tool for traders who want to reduce their amount of losses. This technique protects the capital invested and also helps in keeping control over lost amounts. But here’s a catch: one needs to have a smart and knowledgeable approach to setting a stop-loss order. It is crucial to identify the trade-off between safeguarding your capital and allowing market fluctuations. To get better returns one needs to apply strategic stop-loss orders with other effective risk management tools. This way the traders can enter the market with more confidence and also make better profits. 

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