Stop Loss: Its Importance and Uses
Trading in the financial markets is one of the most famous investment channels that includes millions of individuals, companies, government and private entities in its markets, and it receives great attention from investors and banking institutions. Despite this, loss in these markets is inevitable if one enters without experience and learning the skills necessary to succeed in these markets.
First, there must be a trading plan that includes distributing liquidity, diversifying the portfolio, and keeping a percentage of cash at all times. This plan must be appropriate in its method to the market conditions, whether rising or falling, as dealing with a rising market differs from dealing with a falling market, according to the data in each case.
The trading method comes in second place in portfolio management, after determining a plan for it, as the trading method means relying on financial or technical analysis or a combination of both when choosing deals and entering the market, according to the investor’s proficiency in financial or technical tools, but there is a very important matter that some investors overlook, which is the “stop loss”, as the stop loss is an integral part when executing a deal, when deciding to enter into any deal in any company or security, the investor determines the entry price, and determines the target at which he wants to exit, but although the decision is supposed to have come after a financial or technical study, the investor must set a limit at which to exit if the stock or market violates his expectations, in order to preserve capital, and this is called “stop loss”.
The stop loss ratio differs between the investor and the speculator. The investor usually uses it if the strategy he is using is broken, for example, if he enters after breaking the 50-day average, and thus exits the deal when the average is broken downward, or other long-term strategies. As for the daily speculator, many investors believe that the stop loss should be set at a certain ratio, if it is lowered, the exit is made and the deal is closed, to protect the capital. This ratio ranges between 1 and 2.5 percent as a maximum, so that if the price falls below this ratio, the stop loss is activated and the deal is closed.
There are several other strategies that can be adopted to use the stop loss, the most famous of which are: breaking an upward trend, where breaking it means the end of the rise and the beginning of a downward wave, as well as breaking the 50-day average, where breaking this average often indicates a correction process for the upward path, as well as breaking the price to a previous bottom, where the bottom is support for the price, when it is broken, exit and stop loss are activated, also the price reaching resistance areas and previous peaks with the inflation of technical indicators such as the RSI or Stock Stack indicator and the presence of a high trading rate, these signals often mean the inability of the price to exceed this area, and therefore exiting at that time is better.
Anyone who looks closely at most of the losses incurred by investors will find that the reason is their lack of using a stop loss and keeping the losing stocks, hoping for their return again, and thus the capital evaporates. When the stop loss is used appropriately, it will certainly save them a lot of losses, so setting a stop loss for each deal remains extremely important.
