One of the best risk management techniques in stock trading is to put a stop loss and profit target. This is the best way to minimize the loss that you may face while trading.
Stop loss is claimed to a degree or worth on the far side that if the stock’s current worth goes. In that case, you need to reverse your earlier position. A trader must keep in mind that a stop loss order instructs your broker to sell. When the price hits a certain point or price. The main goal of putting stop loss is to get out of the stock. Before it falls any further and it indicates maximum loss you are willing to absorb.
If you want to understand the theory of stop-loss for example. Then suppose if the stock breaks below a key support level. In that case, traders often sell as soon as possible.
But on the other side, profit target is the price at which you need to sell a stock. And book a profit on the trade. Usually, this happens once the additional upper side is restricted to the given risks. Let us assume that a stock is approaching a key resistance level after a large upward move. So in that case, traders must sell the stock before a period of consolidation occurs.
In general, you sell the profitable shares quickly and hold on to the losing stocks. For a longer period of time in the hope that in future they will bounce back.