If you're a trader in the cryptocurrency, forex, or stock market, the use of a stop loss is a necessary discipline.
Most people dislike using stop losses because they can get triggered when the targets are achieved on a volatile day.
This is a risk you must be willing to take, but the discipline of limiting your losses is essential in protecting your equities.
Here are five ways the stop loss feature can help you as a trader.
1: Stop losses protect your capital from erosion
Whether you are Warren Buffet, Elon Musk, or a small trader, you must be operating with limited capital.
A renowned trader looking for more enormous profits may be working with more risk appetite but will still need to control losses as capital is finite.
This is the only way that can save your capital from erosion.
Stop loss enables you to choose the maximum loss that you are willing to take in each trade.
2: You can churn your money faster
When you're trading for maximum profits, you don't have the luxury of purchasing assets and holding them for a long time.
You need to close as many long positions and free money to put in other trades.
This also allows you to compensate for bad trades through other trades. Your profits come from churning your capital as fast as possible so that you can take numerous positions.
Churning rapidly is profitable as it works similar to compound interest, ensuring that your trading journey is sustainable.
3: Stop loss eliminates the risk of more significant losses
It's a statistical reality that recovering losses takes much more energy.
For instance, if you lost 20% of your account, you'd have to make 25% profits so that you can reach the initial amount.
A 50% loss would need you to make 100% profits and so on.
This is why you need to be using stop losses to reduce the loss as the trade takes momentum against you.
4: They save you from the concentration of positions
It's possible to have a concentration of trades, especially when you're making losses.
If you keep holding on to a position, you may increase your exposure tremendously.
For instance, if you bought a cryptocurrency at $200 and its price drops to $150, you may be tempted to average your position.
When the trade goes against you, you might further need to average your position, which means you'll be making the same mistake over and over.
It would be better to cut off the position at the first chance, which you can achieve through a stop loss.
5: You can get higher leverage
Do you understand what leverage is in trading?
Leverage allows you to trade higher quantities of assets using your funds as a margin.
For instance, if you put in a margin of $50,000 into your trading account where the current price of an asset is $920, you'll only be able to trade about 54 shares.
Since this trade is highly liquid, your broker can choose to allow you 3 times leverage. With your $50,000 you can open positions of up to $150,000, and trade up to 162 shares.
From here, you can increase your leverage as long as you're willing to place a cover order.
You can pair this with stop losses and reduce the risk of the broker considerably. This is how you can improve your leverage.
Final thoughts
According to market research, stop losses is the most necessary tool that leads to trading success.
You should apply the tool in every trade to make you a better trader. If you're not using the tool, it's only a matter of time before you lose control of your trades and lose all your profits.