Before opening a position, consider how much you are willing to lose before closing out your trade. It will serve you well to build a well-thought out strategy and stick with it, because while it is possible for a share’s price to move according to your speculations, there are no certainties. Often when the market moves against a trader’s position, many people will stay in a trade for a great deal longer than considered favourable, in hope that the market direction will soon take a turn for the better. So to try and minimise losses, cover yourself and plan an exit strategy before going ahead with a trade.
Setting up stop losses before you start trading is an effective and widely-used method that saves traders from account wipe-outs from single failed trades. Stop losses close trades automatically when a trader’s account reaches a pre-defined limit, which can help to minimise losses and protect available funds. Please note, however, that regular stops may not necessarily close out a market at the position requested if market volatility is too strong for the trade to be closed at that exact level. Only the use of premium stops guarantees that trades will be closed exactly at the pre-requested level, although in regular market conditions a regular stop loss might work just as well.