An old adage in trading is that trend is your friend. Trading in the direction of the trend is like working in the direction of gravity. If we could catch the direction right, we just sit tight. But then gravity never fails however trends do end, sooner or later. When trend reverses stop loss comes as a saviour. Stop loss minimizes the damage when the trade goes in the opposite direction of our entry. The key word here is “minimizes”. Traders must understand that having a stop loss order does not guarantee that one can avoid losses completely. Sometimes during gap openings stop loss orders would not get a fill at all and at other times, markets would move in the trade entry direction only after triggering the stop loss order and thereby making a trader miss a potential profit opportunity.
But still having a stop loss on your side is beneficial because it may take just one or two Black Swan events to wipe a trader’s entire capital if he is not using stop loss orders. So for long term survival traders should treat and respect stop loss as their savior.
Please do remember no savior can help a trader who has no rules, no patience, and no discipline.
(Contributed by Jitender Yadav)