Stop loss and risk/reward ratio
In trading it's not only what you buy that counts, but how much you risk. Stop loss and risk/reward ratio are the basic tools to avoid getting hurt.
What a stop loss is
It's the price at which you decide in advance to exit at a loss if the trade goes wrong. It turns a big unexpected loss into a small planned one.
The risk/reward ratio
It compares how much you risk with how much you can gain. Risk 1 to gain 3 and the ratio is 1:3. With ratios like that you can be wrong on several trades and still be in profit.
Why it's decisive
A trader can be right less than half the time and still profit, if wins are bigger than losses. The secret isn't "guessing", it's managing risk.
Practise without risk
The best way to learn is paper trading: simulating trades with fake money until the method is solid.
Frequently asked questions
What is a stop loss?
The price decided in advance to exit at a loss, to limit the damage if the trade goes wrong.
What is the risk/reward ratio?
The comparison between what you risk and what you can gain: e.g. 1:3 means risking 1 to aim for 3.
Can you profit while often being wrong?
Yes: with a good risk/reward ratio the bigger wins offset the smaller losses.
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