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What is a Stop Loss and Why is It Important in Trading?

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Introduction

The best stock market investment and the betting exchanges like Matchbook and Betfair all have one thing in common: they are all volatile. Prices change every second and your trades or bets will win or lose depending on certain conditions.

Another common thing about the three is that no one can ever win all of the time. There may be times where lady luck smiles on you and you win consecutive trades, but this is not to say that it will happen each and every day.

Although you cannot control the way the market moves, you can control your losses. In this article, I will talk about one tactic that is so useful to protect your capital. It is known as the Stop Loss Order and you should use it to hedge your assets.

What is a Stop Loss Order?

Also known simply as the Stop Loss, this is a tactic where you offset your current trade with the intention of exiting once a certain price level is reached. In other words, you set a limit and once that threshold is reached, you exit the trade, minimizing your losses in the process.

Why is it Important?

As you can see, the stop order is crucial if you’re trading because it stops the trade whenever the market is not in your favor. Keep in mind that the market doesn’t really care about you; it only cares where it wants to move depending on a number of key factors.

Anyway, this is important for just about any trader out there because the main reason why we want to trade is so that you will earn profits, correct? And, you can only do that if you know how to protect it at all costs.

That being said, here are some reasons why it is important:

1. To Help Protect Your Money if the Market Doesn’t Favor You

Prices in the betting exchange or in the stock market changes erratically and no one can predict when and where it will move. The only sure way you can do is to make sure that you employ measures that will safeguard your assets and the stop loss is definitely one of them.

2. You Can’t Lose Money

I know this is not going to happen all of the time, but whenever the market moves in a different direction than you’ve anticipated, you simply cannot lose money. You’re certainly not going to earn one since you’ve lost, but at least, you’re not losing your profits at the same time.

3. Different Bets, Same Exit

On the betting exchange like Betfair, for example, you place an initial bet on a particular horse that you truly feel would win. However, during the race, you clearly see that the horse is not going to win at all.  So before the race stops, you can easily put a stop loss to ensure that you do not lose money during your imminent loss.

Conclusion

A stop loss is definitely a tactic that you should include in your toolkit. It can safeguard your assets from potential market factors, especially if it is not going in your favor.

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