Can stoploss help us avoiding the risks?

<p id="isPasted">A simple 10% stop loss rule was used in the strategy. Once a 10% loss was exceeded, the portfolio was sold and the cash was invested in long-term US government bonds.&nbsp;</p><p>As soon as the stock market recovered from its 10% fall (the 10% stop-loss was recovered), cash would be moved back into the stock market.&nbsp;</p><p>Stock prices aren't serially correlated, which is why stop-loss orders don't work. In other words, what happened yesterday or last month does not necessarily affect what will happen today, tomorrow, or next month. The past does not determine the future.</p><p>Stop losses, along with the related school of thought known as momentum investing, assume price movements are predictive, contrary to a vast amount of research and empirical evidence. When stocks are going up, momentum investors tend to buy them and sell them when they are declining - trying to capitalize on the trend continuing. It can, however, lead to you buying high and selling low-exactly the opposite of what you want! You might struggle to name a famous momentum investor off the top of your head, whereas there are many famous value investors. Quite simply, it is not an effective long-term investment strategy in our opinion.</p>

<p>Stop losses does not always work. The fact that they prevent big losses in normal market conditions does not mean that they are bulletproof. There are some instances in which setting a stop loss will not help at all, such as market lockdowns, extremely low liquidity, and when the market gaps against you.</p>

<p>When an investor buys a stock, he/she expects its price to rise to a certain level. However, short-term market fluctuations may arise and result in different price levels than expected. A Stop Loss protects an investor against drastic fluctuations as he/she can give instructions to the broker to automatically sell the stock at a particular price. This price is generally set at lower levels than the price at which the stock is bought.&nbsp;</p>

<p id="isPasted">Trading without a stop loss is like driving a car without brakes. Those who trade without a stop loss, eventually stop trading.</p><p>As a trader, you have to be aware that literally, any trade can go against you, no matter how confident you are about it. This is why you always have to know where you will stop if things go wrong. In other words, to protect yourself, you have to use a stop loss.</p><p>Not cutting losses and holding and hoping the trade comes back is one of the most common mistakes that traders make. Yes, the trade may come back once or twice, and you will make money that way but it’s actually very bad for your development as a trader.</p><p>The reason is that you will learn the wrong lesson.</p><p>Next time when you try to do this and the trade doesn’t come back, you will either become a bag holder or blow your account. The point is both scenarios lead to disaster. This is why you always want to use a stop loss and cut losses on time. The safety of capital should always be the first priority.</p>

<p>By placing Stop-loss orders outside the price range of the currency pairs being traded, you can protect your position even if the market suddenly swings in the other direction. Stop loss instills discipline in trade. The idea of trading is that you have a good idea of your risk-return trade off in each trade. That is only possible if you set your stop loss levels and profit targets well in advance. Stop loss is your best defense against market volatility. In Forex a stop loss is designed to limit an investor's loss on a security position that makes an unfavorable move. One key advantage of using a stop-loss order is you don't need to monitor your holdings daily. A disadvantage is that a short term price fluctuation could activate the stop and trigger an unnecessary sale.</p>