If you have familiarized yourself with leveraged trading and other similar topics, you will get to understand that one of the things that should be focused on is money management. You should be able to identify your risk appetite to avoid financial ruin. So to avoid these devastating things from happening, you should consider using a protective stop because it is a very important tool for money management.
What are Protective Stops?
Protective stops are a predetermined point that marks the highest loss that a trader can possibly sustain in a given position. This type of stop is ought to control the trading losses and also called ‘money-management stop’ because just like what its name suggests, it can prevent you from losing your entire capital. It is also related to the risk-reward ratio or the risk that the trader is willing to undertake using his capital when he enters a trading position.
To use protective stops, a stop-loss order needs to be placed in the trading platform. With this order, you can automatically close a trading position, in case the price goes in the opposite direction and goes into the predetermined level in which you refuse to exceed. That being said, stop losses are very important mind mapping software when it comes to protecting the money that you have invested into your account. More importantly, professional traders think that this strategy is the best one to protect your fund from all possible risks.
Protective Stops As A Vital Tool For New Traders
Newbies who are not that adept in the market especially need a protective stop. Professional traders are already experienced enough to diversify and use different methods to profit in the market. But for new traders, their number one aim is to survive in the cruel world of leveraged trading. They also have to gain experience in order to deal and compete with the more experienced traders in the market. The more time they spend in the game, the more they get to learn new things that help in improving their skills. This concept makes stop-loss tools a necessity for newbies and beginners in the market.
The Right Way of Placing Stops
There is no specific system that every trader needs to follow when it comes to finding out where to place the protective stops to benefit from each trade. For traders who use technical analysis, they are using stop-loss order to find the most appropriate time to open a trade. For traders who don’t use technical analysis, they risk an absolute sum of money which is mostly utilized in stock trading.
Risk – this is a term used to identify the amount of loss that a trader can take. To most professional traders, they give advice to the novice ones not to risk more than 1-2% of their trading capital in every trade.
Risk-Reward Ratio – this is a trading style used by a trader in the market.
Volatility – this is the measure of the price range of an asset where it fluctuates. For a volatile market, a stop-loss should be used to minimize the possible losses.