The stop loss acts as a price at which you will exit the trade, this price is usually determined before the trade is entered. The stop loss is the point at which you will exit the trade "no questions asked".
A stop loss will help preserve your capital to make sure you can trade another day.
If the trade stop is hit by the current price, exit the trade "no questions asked".
A stop loss is usually calculated before a trade is opened. Various trading systems will employ the use of a trailing stop loss to signal an exit on the trade.
Trailing stop losses ratchet up as the share price moves up, this has the effect of locking in profits once the trade has moved in your favor.
Remember, a stop loss is simply a mechanism which signals the exit of a trade.
A basic example of employing a stop loss is provided below.
John has decided to buy $20,000 worth of "XYZ" shares with his $50,000, he has decided that he does not want to risk more than 1.5% of his capital on the trade. The current share price of "XYZ" is $2.00.
John calculates that he is going to risk $750 on this trade (1.5% x $50,000). John then buys 10,000 shares of "XYZ" at $2.00.
John sets his stop for this trade to equal a loss of $750 (i.e. the price which will realize John a loss of only $750). John's stop for this trade is $1.925 (($20,000 - $750) / 10,000), if the share price where to drop to $1.925, John would immediately sell his holding in "XYZ".
The trailing stop loss is a stop loss which moves in accordance to the share price and provides an exit point for the trade.
If you can imagine the share price constantly rising, you would want to preserve some of the unrealised profit. You can do this with the use of a trailing stop loss, the same concept of a stop loss still applies. That is, the trade is immediately exited when the current price reaches the trailing stop loss price.
The most important thing to remember about the stop loss is its importance in signaling an exit point for any trade. Many believe the exit is far more important than the entry, whichever way you look at the stop loss it will:
Determine when you should exit the trade
Lock in profit or fixed loss for each trade
Preserve your capital to ensure you can trade another day!
A stop loss will help preserve your capital to make sure you can trade another day.
If the trade stop is hit by the current price, exit the trade "no questions asked".
A stop loss is usually calculated before a trade is opened. Various trading systems will employ the use of a trailing stop loss to signal an exit on the trade.
Trailing stop losses ratchet up as the share price moves up, this has the effect of locking in profits once the trade has moved in your favor.
Remember, a stop loss is simply a mechanism which signals the exit of a trade.
A basic example of employing a stop loss is provided below.
John has decided to buy $20,000 worth of "XYZ" shares with his $50,000, he has decided that he does not want to risk more than 1.5% of his capital on the trade. The current share price of "XYZ" is $2.00.
John calculates that he is going to risk $750 on this trade (1.5% x $50,000). John then buys 10,000 shares of "XYZ" at $2.00.
John sets his stop for this trade to equal a loss of $750 (i.e. the price which will realize John a loss of only $750). John's stop for this trade is $1.925 (($20,000 - $750) / 10,000), if the share price where to drop to $1.925, John would immediately sell his holding in "XYZ".
The trailing stop loss is a stop loss which moves in accordance to the share price and provides an exit point for the trade.
If you can imagine the share price constantly rising, you would want to preserve some of the unrealised profit. You can do this with the use of a trailing stop loss, the same concept of a stop loss still applies. That is, the trade is immediately exited when the current price reaches the trailing stop loss price.
The most important thing to remember about the stop loss is its importance in signaling an exit point for any trade. Many believe the exit is far more important than the entry, whichever way you look at the stop loss it will:
Determine when you should exit the trade Lock in profit or fixed loss for each trade Preserve your capital to ensure you can trade another day! 
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