Those who set the SL have made a limited loss on that GBP flash crash day, but those who did not fix it have experienced a severe one. So now the question is, what is stop-loss in 2024? It is a kind of risk management tool for investors. Its job is to protect the trader from any unexpected event like a GBP flash crash.
Suppose you have bought GBP, hoping that its price will go up very quickly. But unforeseen circumstances may arise anytime, so you set an SL at 2%. Now, if its value suddenly goes down a lot, you will not lose more than 2%. Because as the price drops and touches 2%, the SL will automatically sell your currency. But if you have not set it, you would face a much more significant loss. Now let us discuss why we should use Stop-Loss and its disadvantage.
Risk Management
SL is an essential risk management tool. It helps you to lessen your probable loss. If your currency’s value decreases to any extreme level, you need not be tensed that much. The SL has taken your responsibility to sell your currency. As a trader, you should always trade with 1-2% risk. To know more info about the risk exposure factor, you may visit the official website of Saxo. Enhance your knowledge and learn to take the trades in a structured way.
Tension-Free Trading
Since you have set a tolerable stop-loss level, there is no need to stress over how much the currency price has decreased. Because even if the price of the currency goes down a lot, it will be sold at the SL point you set. So, it allows you a tension-free trade.
Pre-Sell Order
You may not always sit before the computer or mobile screen to observe the market value movement. You need rest, sleeping or you can go to the washroom. But what if the price of the currency falls in the meantime?
So, it is better to set an SL in advance. It works like an advanced sell order. If you order a Stop-Loss at 2%, it means that if the price goes down crossing 2%, your currency will be sold immediately by the SL. Even if the market drops due to major news release, you won’t have to take heavy loss.
Problem Of Stop-Loss
Stop-loss not only benefits us, but it also sometimes harms us. However, we are responsible for that loss because we might not use the SL properly. If we can use it properly, it will bring us benefits.
Suppose you think that the market price of the dollar is now relatively low, but within the next two weeks, its value will start to rise. So, you have opened a position trade for two weeks and invested a lot. Meanwhile, for risk management, you set a Stop-Loss at 2%.
Now think, if, after some days of opening the trade, the price goes down to 4% and starts going up again, what will Stop-Loss do? As soon as the value decreases and touches 2%, SL will sell your currencies automatically.
But this simple price fluctuation would not affect your trade because you are aiming to hit on the second week. But since the stop-loss has already sold the currency, you have nothing but to experience a 2% loss.
Stop Your Losses From Growing Too Large
Everybody should have vast knowledge regarding Stop-Loss as it plays a vital role in trading securities. Anyway, we should do a detailed study on Stop-Loss, use it properly, the risk to reward ratio, and calculate it. Because if you can use Stop-Loss properly in return, it will give you good feedback.
