Stop loss is almost a mandate thing for intraday traders. This is because the stock market is impossible to predict accurately, and the risk of such volatility gets more pronounced for intraday traders.
It shields you from unlimited losses. In the short run, markets are driven by greed and fear, unlike in the long run, and react fiercely to news flows. Using stop-loss, you can save yourself against such movements driven by emotions. Thus, stop-loss is an exit plan of a day trader.
Table of Contents
Stop-Loss Market Order
A stop-loss order is an order to buy or sell a stock at a specific price. Usually, in intraday trading, stop-loss orders are market orders, where a buy or sell order will be executed immediately at the prevailing market price.
It will accept the current market prices that buyers and sellers are ready to pay or accept. Here the certainty of trade execution is a priority.
Let us understand with an example. Suppose you set a stop-loss order for 5% below the stock price at which you purchased it. It means your trade will be closed once the price reaches your set price, i.e., less than 5% of the purchased price.
Thus, your losses will be limited to 5% only. For another example, suppose you bought shares at Rs.450 per share and entered a stop-loss order for Rs.415 per share. If the stock price goes down, your shares will be sold at the prevailing price.
Stop-Loss Limit Order
Stop-loss limit order is another type of stop-loss order. Here once the stock price touches your stop-loss price, i.e., Rs.415, the position will be automatically closed. It is a request to buy/sell a stock once a particular price is reached.
It has a drawback that it doesn’t allow you to close the trade even if the price starts to move aggressively against you. Here certainty of price is a priority.
To place an intraday trading order, the speed of your trading platforms matters a lot. It should be fast enough. Otherwise, it may miss the price at which the order should be placed.
Also Read: Brief Journey for Loan Types in India
While opening an online trading account, you can ask for a demo from the stockbroker. You can open a Demat and trading account simultaneously for free, but it may be a basic trading account. Better to confirm the day trading facilities with your broker.
How to set a Stop Loss
One can not place a stop-loss order at a random level. Before placing a trade and applying a stop loss, a trader must evaluate their risk appetite. As per the discretion, a trader has to decide on how much risk he/she can bear in a particular trade. It is vital to apply the stop loss effectively as an intraday trading idea.
Technically, there are two methods to decide on the stop-loss limit – the support & Resistance Method and the Average Moving Method. Both are the strategies used by various financial specialists.
The easiest method to place a stop-loss order is to set it below a “swing low.” A swing low is the level where the price decreases first and then bounces back. The stock price finds support at this level.
Ideally, there should be some fluctuation at the point and flexibility to get out of your position before getting it terrible if the price starts to oppose you.
Thus, stop loss:
- helps to protect your capital
- introduces discipline in trading
- acts like a defence against market volatility
The Bottom Line
Stop-loss ensures decision-making without any kind of influence. An intraday trader needs to make a stop-loss habit, necessarily.
It will resist you from falling in love with your stocks and giving them another chance. A delay only causes increased losses. Prevent your trades from clouds of emotion.
