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Key Takeaways about Stop-Loss
- Ideally, bet only 2% of your capital on one stock
- Stop-Loss evaluation depends a great deal on time and fluctuation
- In contrast to traditional belief, this mechanism involves timing the market (making predication based on a wide-ranging analysis) and safeguarding capital
- Long position means when trader buys a stock in the hope to sell it at a higher price during the same trading cycle (which may be a day in Cash Market or a month in Derivative Market). Short position is exactly the opposite
Losses are in common to trades and are mostly impulsive but not unavoidable. Your apprehension to get into the market is justified; nonetheless, think about the potential profits this very volatility can reward you with. Even the most evolved trader’s predictions (better yet, analysis) can flaw since that is how the stock exchange is. Stop-loss is a common term but to execute it in a right way is important and that is exactly what we discuss here.
Stock Market Overview
Stock market is greatly hot-blooded and can rapidly reverse without any notice. This can be due to a variety of reasons, two most significant being:
- Fundamental-level changes within a company
- Emotional rush creeping through the market (at a technical-level)
Understanding market is linked with precise determination of stop-loss since if you can read the signs, you somehow tip-off on the future to protect your capital.
What does Stop-Loss mean?
A stop-loss order is a buy/sell order that is to be placed with the broker to sell the securities and close out the position at a certain price. In the stock market, stop-loss order helps investors & traders in limiting losses to a price in case if the market moves in the opposite direction.
Stop-Loss in Share Market
For instance, if you’ve purchased a stock at Rs. 1000 and to limit your loss at Rs. 900, you can place a stop-loss order with your broker to sell the stock as soon as the price comes down to Rs. 900. Once the stock price reaches this level, the order will be triggered and you will automatically exit the position.
There are two types of stop-loss orders in the share market:
Where to place Stop-Loss orders in buying position?
You have a buy position at Rs. 1000 and you want to place an SL at Rs. 900.
Case 1: SL-L order type
When placing the Stop-loss limit (SL-L) order, you will mention a price and a trigger price to specify limit or range of the stop-loss. Let’s assume, you set a limit of Rs. 30. Here, your trigger price is Rs. 900 and limit execution price is Rs. 870. The SL limit order will be sent to the exchange and your position will be automatically squared off once the price falls in the range between you specified.
Case 2: SL-M order type
In using a Stop-loss market (SL-M) order, the investor will only need to mention the trigger price in order to square off his/her position once its break the trigger price. Once you place the SL-M order with the broker, the order will be sent to the exchange and you will be closed out of your position at market price.
Where to place Stop-Loss orders in selling position?
You have a sell position at Rs. 1000 and you want to place an SL at Rs. 1100.
Case 1: SL-L order type
In using a stop-loss limit order, you will mention a price and a trigger price to specify limit or range of the stop-loss. Since your order needs to be triggered first, the trigger price should be smaller than or equal to the limit price. Let’s assume you set a limit of Rs. 30 where your trigger price is Rs. 1100 and limit execution price is Rs. 1130. The SL limit order will be sent to the exchange and your position will be automatically squared off once the price falls in the range between you specified.
Case 2: SL-M order type
With a trigger price of Rs. 1100, a Stop-loss market order will be sent to the exchange and you will be closed out of your position at market price.
Stop-Loss Strategy
Stop-loss strategies can help investors and traders from holding their losing investments too long by automatically closing out the position and thus reduce investment risk. Often it has been seen that many investors and traders hold onto their losing investments too long and sell their winning ones too soon. Such behavioural tendency is highly risky for investors and the use of stop-loss strategies can help in selling losing investments and realize looses sooner.
To protect investments and limit the risk, one shouldn’t place stop-loss at a random level. One must find a place where the market has enough room to fluctuate while it starts to move in your favour and get your out of the trade if it moves against you.
Here, we have mentioned some key points to keep in mind when setting up a Stop-Loss
While keeping these points in mind will assist you in determining where to set the stop-loss, it is important to note that no two trades are alike and diverse factors govern different trades. Continuously evaluate and analyse the trade for a good trading judgement.
When placing an order for trade, you need to select a product code to identify the category of the order. There are multiple product codes, namely:
