A trading plan is an important component of trading success. Trading without a trading plan can be likened to adventure without a map. You might be able to reach your goals, or you might not, but with a longer time.
One important part of a trading plan is risk management. There is no trading system with a win rate of 100% so that without reliable risk management, traders will have difficulty achieving their success targets. One application of risk management is in determining the risk we dare to take or stop loss. Thus, you need to know the importance of Stop Loss in a trading plan to maximize your trading profit.
Check out the importance of Stop Loss in a trading plan:
Get to know Stop Loss
No one can know with certainty the future market movements. The direction of movement can change dramatically because of the influence of data or a major event. This uncertainty is a risk faced by traders.
According to Investopedia, Stop-loss is designed to limit a trader’s loss on a position in a security. Traders use stop loss to limit the potential loss of a transaction and also to avoid the involvement of emotional factors in trading.
Then how do you apply stop loss in transactions? Let’s recognize one type of stop loss in a trading plan.
Static Stop Loss
With a static stop loss, a trader places a stop-loss order at a certain price and does not change the stop order until the price touches the limit or stop that was placed. Static stop loss is simple and traders do not need to always check their trading positions when unexpected moves occur because the stop loss position is in accordance with the amount of risk that is ready to be accepted.
Determination of static stop loss can be based on technical indicators, for example, such as Average True Range. As support, traders can also use the actual information on the market to try to analyze risk management choices more accurately.
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