A stop loss is an order that you give your broker to "stop losses" ("stop-loss").
The golden rule of stock market speculation is to always keep risk under control. To do this, you have to know how much you are willing to lose before buying your shares.
Once you know or decide that figure, you will give an order to your broker to open the position.
Also, immediately after giving the buy order, you must leave a stop loss, which is a sell order that will only be executed if the price falls enough to cause you your maximum allowable loss. In which case, your shares will be sold before suffering greater evils.
You should know that the orders that are not executed are free; So controlling the risk in your stock operations will not cost you anything, but it will save you a lot of trouble.
Trading without a stop loss is like driving a car without brakes. Always use a stop loss.
One of my mistakes was (and sometimes still is) is to think that there is a technique to stop. After experimenting with thousands of trades, or is there a better stop technique than the money you are willing to lose without losing sleep or your capital. It may be a 3: 1, 15: 1, 1: 1 ratio, whatever it is… .. or whatever% it is… 10% 50% 20%, but always having a stop according to each operation I carry out is the key.
EXAMPLE
Assume that the dividend yield on a company's stock is 8%. They are definitely worth buying.
But by pure statistical noise, the value drops 5%. It can happen, for example, because some wealthy heirs decide one day to sell a lot of shares. The first stop-loss is activated, which makes the price fall ... which causes more stop-loss to be activated ... thus the price falls further. In other words, a cascade of stop-loss activations and a plummet of the market value is triggered. Until someone sees that the dividend yield is 40% and you have to take advantage to buy.
In other words, stop losses do nothing more than amplify the normal statistical noise of the market value. They can't be applied blindly without looking at the fundamentals
