A stop-loss order is a type of advanced trade order that can be placed with most brokerages. To put a stop loss and Profit target is one of the best risk management techniques in stock trading.
For traders, Stop Loss Orders are extremely important tools. We know that the global markets operate day and night, making it virtually impossible for a single trader to follow multiple deals on a variety of shares, commodities, currencies, and indices. Various instruments are extremely volatile and can experience huge price changes in a matter of hours, or even minutes. However, the Stop Loss orders offer a simple solution to investors’ need to carefully monitor changes and help protect a trader’s balance.
Various veteran traders believe that Stop Loss orders are not a perfect solution if they are not used carefully as they can also limit potential profits by effectively closing a deal too soon.
This is the best way to minimize the loss that you may face while trading. Stop loss is said to a point or price beyond which if the stock’s current price goes, in that case, you need to reverse your earlier position. A trader must keep in mind that a stop loss order instructs your broker to sell when the price hits a certain point or price. The main goal of putting stop loss is to get out of the Stock before it falls any further and it indicates maximum loss you are willing to absorb.
If you want to understand the theory of stop-loss with an example then suppose if stock breaks below a key support level, in that case, traders often sell as soon as possible.
But on the other side, profit target is the price at which you need to sell a stock and book a profit on the trade. Usually, this happens when the extra upside is limited to the given risks. In general, you sell the profitable shares quickly and hold on to the losing stocks for a longer period of time in the hope that in future they will bounce back.