The Stop Loss

Trading shares should, over time, lead to better outcomes than betting on the outcome of tossing a coin. There are three main reasons for this.
1. You should have tested your trading system to ensure that, on average, it provides a better than 50/50 chance of success.
2. Each time you toss a coin, the best possible outcome is that you double your money. In a single trade it is possible to multiply your funds by 3,4,5,6......20,30....some very large number (if the trade goes expectionally well).
3. Each time you lose on the toss a coin, you lose all of your stake money. Provided you set a stop-loss it is highly unlikely you will lose all of your money in a share trade. Your stop-loss will be triggered and you will exit the trade having sufferred a controlled, relatively small loss. (On rare occasions, you will lose more - for example if you buy the shares of a company that, overnight, goes out of business.)
To avoid large losses when a trade goes against us, we set a strict stop loss on each trade. Some traders prefer to set stop losses at a fixed percentage. If the price of a share they have bought falls by, for example 5 percent, they sell. This is called a trailing stop loss. It trails the share price. If the share price goes up, the stop loss rises in tandem, always moving to 5 percent below the highest price reached (or the price you paid - whichever of these is higher). Other traders prefer to set their stops in accord with share price history. If, for example, a shareprice has found support at a particular level, they will set the stop loss slightly below this support level.