3 RISKS of using STOP-LOSS that YOU MUST KNOW!!!

What are the main risks when using a stop loss? Because you may be thinking, well, you know, I have attended some course. They show me how to trade in a safe way. I just need to put a stop loss. Is it right? Not really. Why? Because it's true that stop loss is important. But maybe what they forgot to tell you at those courses is that stop loss may not work the way it should. So in this video I'm showing you three things that you should consider. The three main risks, in my opinion, when using a stop loss. So what are these three risks? Number one, liquidity. Number two, gaps. Number three, broken. So let's repeat again. Liquidity gaps broker, if you want to remember. Lgb. Okay, so let's move on to the first one. Liquidity. What does it mean? Liquidity refers to the volume, the amount of shares that start trade on the stock that you want to buy, your etf, whatever it is. Now, what is the problem if there is not enough volume? If the liquidity is low, it may be hard for you to exit at the price you wanted to exit. What do I mean? Suppose that you buy the shares and then the price is going to the stop loss level and is going below. But then when the order of selling is triggered, if there are not enough buyers, the order will not be executed. So this is very dangerous when there is not enough volume and especially when you have a large amount of shares. Maybe because you are trading a stock with a low price, penny stock. So that's why checking volume is very important. Number two, what can happen is that the stock you are trading suddenly, for some reason, like an earning announcement, maybe because of some bad news, suddenly gaps down. What does it mean? It means that yesterday maybe was trading at $30 and the opening price of today is $10. So what happens if your stop loss was at 25? Do you sell at 25? No, because the stop loss, remember, is a trigger, no guarantee that you will be able to sell at that price. So whatever is the price, that's the transaction price. Meaning to say in this example, price is at 30, your stop loss is at 25. Let's say if it's opening at 10, you probably be filled at 10. What is the consequence? Well, you may already have realized by now that if you do that, you are losing much more than what you were thinking about when you place your trade. So your risk management is completely off. Now maybe you were risking 1% and you end up losing 10%. Okay, so always remember this because gaps can happen even if you close your position before Earnings, you may still have gaps because you know bad news can happen. So that's why it's also important that you choose solid and strong companies because the probability of having these bad news may be lower. And at the same time, these companies usually are much more traded. So you coming back to the previous point, you don't have the issue of low volume. Okay, so what about number three, the broker? You may be saying, okay, well what do you mean by the broker? Right? Why is it broker a problem? Well, personal experience. Okay. When I attended the courses where they were teaching me how to trade, I just attended one to get the basis. Well, they say something about the stop loss, but nobody told me that broker may not execute your stop loss in theory should not happen. And I'm not speaking about like very, very cheap or unreliable brokers. I'm speaking about some of the largest brokers and I'm not mentioning the names, but if you watch my video, you will find out. So it happens with two brokers. One time I was trading, okay, so what happened is that my stop loss was quite tight. And imagine I enter my position and then the price is going at the stop loss is going below the stop loss and it didn't trigger. And I'm still looking at the screen, I'm saying what the hell is going on, why it's not triggering? And then it's going down. So I keep losing money by the way, right? It's going down, down, down and it's still there. And then suddenly I got the message, your order has been rejected. I was what? Rejected? They didn't tell me that this may happen in the course. I have attended a rejected. So eventually I have to quickly close manually the position. And then I had a chat with the support from the broker, right? And then they told me, oh yeah, because you know, by the time the price, by the time you enter the position, then the price quickly moved below the stop loss, so it was already too late. Some, some kind of bullshit explanation. But basically they were trying to justify, in my opinion, some issues with their platform, but they didn't want to refund me. They say, well, if you want to complain, go ahead, we don't care. Case number one, case number two, another broker, I have my stop loss. The day after I check my position, surprise, the position is still open and the stop loss is above the price. So it should have triggered that time. I chat with the support and I told them, okay, look guys, there is something wrong here because the stop loss, I'm pretty sure is correct. I double Checked, it should have triggered. There is no reason you can find to justify the fact that it didn't trigger. So eventually they refounded me. They didn't say what happened. I think it was some issue again with their platform, some technical issue. But it can happen. So you need to be careful because these kind of things like the stop loss or when you put an order in theory, in theory everything will go smoothly, but in practice things like that can happen. So you need to know, especially if you are using a lot of margin leverage, you are having a portfolio where you are using a lot of money that you don't own. So you know when you use margin and leverage is the broker who is giving you money. And then you say, well, what's the problem? If I lose, I know with my stop loss how much I'm losing. Well, after this video, I hope you realize that actually this is a theoretical number. It can be worse. And I'm not even touching the short selling. What can happen in the stop loss with the short position doesn't trigger. This could be a nightmare. Because when you are going long, if you don't use margin, the maximum you can lose is the money in your account. But if you short sell and for some reason your stop loss isn't triggered, you may lose more than what is in your account. So you may have to top up. This is scary. It's like oh, I have $10,000 in my account. And the day after the broker is saying, well you know what, you have to give me like $50,000 more because that's what you lose with your short position. And many people don't know that. Many people don't realize that. They think stop loss means safe. No, stop loss is a measure that you can take to make sure that your risk is more or less under control. But it doesn't give you the hundred percent protection. Okay, so I wanted to make this point quite clear because I've seen recently some stocks with crazy gaps. You have seen the Gamestop what happen. These things can happen when you have huge volatility. Your filling price may be very far from your stop loss price. So just to recap what we have learned today, the three risk factor for using a stop loss, the lgb. Okay, Liquidity. So the volume choose something with large volume gap. So important to close a position, for example, before earnings if you are trading and not to choose shitty companies. Sorry to say that, but when a company is not reliable from a fundamental point of view is more likely that bad news can happen. And number three, after the liquidity and the gap we have the broker. So choose good broker. But even if you choose good broker, technical problems can happen. So you need to be aware of that when you are managing your risk and you need to know that this thing can happen so you don't panic, you understand the rules of the game you are playing and then you will be able to take better informed decisions with this. I really thank you for watching this video and see you next time.