Q: Why should you use a stop?
A1: Because you'll make more money more consistently by using a stop than by not.
A2: Because you'll preserve your capital whilst you're learning how to trade.
Q: But I traded XYZ and was stopped out only to see it go sky high afterwards!
A: Stops do that sometimes. However, stops also protect you from a stock which keeps going down. The protective effect on your capital outweighs the whipsaw effect many times over. You can always re-enter a rebounding stock. You can't exit a stock in freefall in hindsight.
Q: What's the best stop?
A: There is no perfect stop, just as there is no perfect entry. A stop which is too close to the price action will take profits quickly, but will suffer from frequent whipsawing. A stop which is too far away from the price action will give back too much profit before exiting a trade.
Q: Aw c'mon, what's the best stop?
A: Your stop strategy determines your trading frequency. Are you a long term trend follower? Use a wide stop. Are you a trader who wants to hold for days/a few weeks? Use a tight stop. As a hint for new traders, your best chance at surviving is to learn to trade longer time frames first, and then consider shortening your average holding time.
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