Controlling Risk & Protecting Profits

Setting stops is a very underrated and misunderstood concept in trading. Your stop-loss placement impacts your trading performance on so many levels. It decides over the reward: risk ratio of your trades and, thus, determines the expectancy of your trading system. It also determines how adaptable your trading strategy is overall. In trading, there are several different stop-loss types that we will discuss.

A stop-loss order protects profit or limits risk on an investor’s open position by exiting at a predetermined price. A stop-loss order is a trade placed with your broker to sell a security when it hits a defined price. Stop loss orders help to limit your potential losses when a trade goes against you.

When you’re trading, the only time you have complete objectivity is before entering a trade. Once you are in the trade, you begin to lose your objectivity due to emotions. This is why it’s imperative that you not only use a stop loss but determine your stop price before entering a trade.

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