The One Important Benefit of Stop-Loss Orders

Earlier we discussed the negatives associated with placing open stop-loss orders in the market place. Despite these negatives, this approach offers one significant advantage over other alternatives. Before unveiling that advantage let's first define what a stop-loss order is intended/and not intended to accomplish.

The purpose of a stop-loss order is not to enhance the performance of your system. Likewise, the purpose of a stop-loss order is not directly to increase the profitability of your trading. The purpose of a stop-loss order is to hopefully minimize your losses on any bad trade enough so that you can still come back to trade again tomorrow. Nothing more, nothing less. A wise old trader once said it best when he stated "the purpose of a stop-loss order is to save your sorry assets."

The way to make money trading futures is to stick around long enough to earn enough profits to offset all of the inevitable losses. If your approach to trading stinks, stop-loss orders won't make you a profitable trader. However, if you do have a winning approach to trading the only thing that can derail you is "that one bad trade" or that series of huge losses that knock you out. The only way to safeguard against huge losses is to use stops to protect your capital. And the only way to guarantee that your stop-loss order will be in the market when it needs to be is for your stop-loss order to indeed be there.

In case you are having trouble reading between the lines, this author advocates the use of stop-loss orders.

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