Do you want to get into the intraday trading? you must know what is stop loss strategy and how to use it.
The stop loss term is a buzzword in day trading because most people use it as a tool to safeguard their wealth. The graphs on day trading fluctuate so fast that sometimes, in a couple of moments, your stock prices crash. Stop loss is an excellent strategy that helps you to tackle those scenarios.
In this article, we are going to talk about the stop-loss strategy, its benefits, and the cons. But before we go there, let’s understand day trading as it is related to it directly.
What is day trading?
Day trading is a form of speculation in securities, especially stocks, that involves buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Traders who trade in this capacity with the motive of profit are therefore speculators.
What is stop loss in stock trading?
As you can see the term “stop loss,” simply denotes that it stops your losses. Now, when you trade online via online platforms such as 5paise, Zerodha, or something else, you get this fantastic option to stop loss. It helps you book further losses if the market crashes.
Stop loss is a technique that traders use to limit their losses in intraday trading. Intraday trading is the practice of buying and selling stocks within the same day, without holding them overnight. Stop loss allows traders to set a predetermined price level at which they will exit a trade if the market moves against them. This way, they can protect their capital and avoid losing more than they can afford.
Stop loss can be either fixed or trailing. A fixed stop loss is set at a specific price, regardless of how the market fluctuates. A trailing stop loss is adjusted according to the market movement, following a certain percentage or amount below or above the current price. Trailing stop loss can help traders lock in profits and capture favorable trends, while fixed stop loss can prevent traders from being stopped out too early or too late. Here you set a price point where you sell your shares automatically when the share price hits that mark.
Let’s understand this with an example.
Let’s say you bought a share of a company ABC at Rs.200 per share. Now, as you have purchased it at Rs. 200, you and all other investors would like to share at higher prices because that’s how they make money from it. If they can sell it at Rs.250 or 300, they will make Rs50 or 100 profit per share.
But, what if the share price starts falling?
While trading for intraday, the prices hit the lowest mark, all your investments are likely to wipe out. If you look at the live charts where the share prices fluctuate in real-time, you will notice, it moves so fast that sometimes, it makes it quite hard to take any decisions.
Now, if you enable the stop loss at Rs190, and the share princess starts falling, whenever, the price touches that point, your shares get automatically sold out.
Now, the benefit you get with stop loss is, you face only a little less than any bigger and huge losses.
It’s up to you, on which price tag you want to set for the stop loss. All the stock market thing runs through orders, and stop loss is also a kind of order.
Even when you activate the stop loss order, it remains inactive, until the share prices do not hit the selected mark. That means, if you select the share price at Rs. 190, your stop loss order won’t be activated unless the share price drops down to the mark.
Benefits of applying stop loss:
There are many benefits of implementing stop loss while you trade in stocks such as,
Decreasing your losses:
Stop loss is an automated system that stops booking bigger losses. When you set the bar at your considerable loss point, even when the share price keeps falling, you sell it right away. That’s you don’t get big financial losses.
It reduces the headache of frequent checking:
If you don’t use the stop loss, it is always an overwhelming task to continuously monitor the share market ups and downs. For any reason, if you can’t be there for a long time and when you move back on monitoring, you see that the share price is already gone too low and you are in huge losses. Once, you embrace the stop loss, you need to worry much about the market crashes. If the share price falls to your set point, it will be sold out.
It saves your time:
If you are a full-time investor, it’s your job to stay in front of the TV, or stock market news consistently. But, what if you are not taking it full-time? Well, most people don’t have enough time to invest their whole time in this. They just buy any share and hope for higher retunes. People who don’t have much time to look at these things must use the stop loss.
Well, everything in this world has its own drawbacks and the stop loss is no exception at all. If you are using the stop loss there is actually a loss that might happen.
The disadvantage of stop loss:
As you know the main objective of stop loss is to protect your fund when the share price is falling badly. Now, it is a mechanism that triggers automatically whenever the price hits that mark. Now, in trading, the share market fluctuates for various reasons, and in most cases, if certain mishappens do not take place, at the end of the day, the share price remains quite expected. If you see at the share market charts, the prices in the morning stay low, and after the afternoon the market starts to gain.
Now, due to the stop loss, your shares got sold right away. Here you miss an opportunity to gain bigger.
Now, as you have had the above portion of the article, you have probably understood how important it is to put a stop loss when you are intraday trading.
But, do you know, it’s not like that you thought of a price point and set the stop loss.
There are certain strategies people use while trading intraday. Below we are mentioning some of the
Key strategies to set stop loss:
The first strategy is for beginner investors, and it is called the percentage method. Here you do not need to go for complex things. You only calculate the percentage of your share and you set it as stop loss. For example, if you buy a share at Rs 200, and you calculate the minimum 10% drop. Typically that percentage investors take as the stop loss percentage. Now, if you calculate the percentage, it is Rs180. That means, once the share price hit that amount, your shares will be sold. Even though different traders have their own types of calculations and methods, the percentage method is widely used by them.
Now let’s come to the next option,
The support and resistance method:
This method is for people who have been investing in stocks for a while. Here you use share market sharts. Share market charts denote the upper and lower price of a specific share for a specific duration. The share market charts disclose all the ups and downs of pricing be it for a day, 7 days a month, or even years. We are here talking about the intraday so, here you need to understand the support level which is the beginning price when the market starts.
The resistance point is the upper limit of the share price during the given time. To set the stop loss with the support and loss strategy, you have to first determine the support price of the share. Let’s say the opening price of the share is Rs300, then you have to look for its support price. After that, you need to find the support price. Let’s say its support price is Rs285. Then you can set your stop loss value at Rs. 283, or something like that.
Stop loss is a trading strategy that involves setting a limit on the amount of loss that a trader is willing to accept for a given position. When the price of the asset reaches the stop loss level, the position is automatically closed, thus locking in the maximum loss and preventing further losses. Stop loss can help traders to manage their risk and protect their capital from adverse market movements. However, stop loss also has some disadvantages, such as being triggered by temporary price fluctuations, missing out on potential profits if the price reverses, and facing slippage or execution delays in volatile markets.
Conclusion:
Even though due to stop losses you may lose an opportunity for higher retunes, still you should not avoid it and imply it after thorough calculation. If you are a newbie or have little to no time to invest in these things, stop loss is the best option to safeguard your funds from bigger losses. Most people lose their money on the share market because they become too greedy. For bigger returns, if you don’t enable the stop loss, chances are, you will face severe losses. Therefore, stop loss is not a perfect strategy and traders should use it with caution and discretion. It is important to consider the market conditions, the trading style, and the risk tolerance of each trader before deciding whether to use stop loss or not.
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