Tuesday, 30 January 2007


For those who are completely new to this game, Stop Losses, as the name implies, are used to limit a trade's loss. For instance let's say, you have opened a LONG position on BP @ 550 and you want to limit your liabilities by only 10 points or in other words, you want to have your position closed if BP goes down to 540, so in this case you instruct your broker to sell the stock when it reaches 540.

Using Stop Losses can have both their advantages or disadvantages:

It is a disadvantage in the case of market being over-volatile when an instrument can spike up or down by many points in a short space of time and the advantage is that you could save a lot of money if you have happened to have read the trend of your stock incorrectly. Normally, stocks on the Uptrend or Downtrend can move away from you by a long way if you have had a bad entry point. So putting a Stop Loss in this case will help a trader to save a lot of his/her Capital.

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