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Predatory Trading and Crowded Exits: New thinking on market volatility by James Clunie

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Chapter 4. Stop Losses

A stop loss is a mechanism whereby a trader attempts to close out a position once the loss on that position exceeds some pre-set threshold. In effect, it is an instruction to buy or sell a defined number of securities once the market price reaches a pre-defined level.

The use of a stop-loss system does not in itself guarantee that the trader limits his loss to the threshold chosen – where liquidity is poor, or where a security gaps in price, it might not be possible to sell the security at the desired price. Nevertheless, some spread-betting firms and investment banks offer guaranteed stops to traders, but as making this offer entails risk, it must be compensated for by means of higher charges or poorer spreads.

Where ...

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