Intraday Trading

Calculating Stop Loss

A stop loss is a measure that shows you how much you can lose on a trade. You should calculate your stop loss before you trade so that you are prepared in case the trade changes direction. Stop loss orders are useful for minimizing losses if the stock price moves in a different direction than expected.

What is Stop Loss?

Intraday traders assign a stop loss level to their trades before they open. The transaction is automatically closed when the cost exceeds the predetermined stop loss amount. The trader can save any remaining money she has invested. You can start to plan how you will return the money that was lost. A stop loss order is a way to prevent a bad trade becoming worse in terms of lost money.

How do you calculate your stop loss?

Let's look at an example to show you how a stop loss appears on a trade. Let's say you are looking to buy a stock that is currently trading at Rs104. Now you need to decide where your stop loss should be placed. A good rule of thumb is to keep your stop loss below Rs100 at Rs98. This means that you are OK with losing Rs6 in this trade. However, the transaction will be terminated if it exceeds Rs100.

Your target amount should equal 1.5 times your stop loss percentage. The stop loss in this example was Rs6, which is something you can live with. Therefore, your minimum gain should be Rs9 which would make you Rs104 + Rs9 = R113.

How do I set my Stop Loss Level?

Many traders who are new to trading struggle to decide where to place their stop loss levels. Setting her stop loss too high can lead to big losses if the stock moves in the wrong direction. Or traders who set their stoploss level too close to their buying price can lose money if they take out their trades too quickly.

There are many strategies that can be used to determine the stop loss amount for each trade. You can distill these strategies into three options to determine where your stop loss should be set.

  • 1. Percentage Method
  • 2. Support Method
  • 3. Moving Average Method

Calculate Stop Loss By Using the Percentage method

Intraday traders often use the percentage method to calculate their stop loss. The percentage method is simple: one simply needs to assign the percentage of stock price they are willing to lose before exiting a trade.

Let's say, for example, you are happy with your stock losing 10% before you exit your trade. Let's also say your stock trades at Rs50 per share. Your stop loss would then be Rs45 -- Rs5 below the stock's current market value (Rs50 x 10 = Rs5).

Calculate Stop Loss By Using the Support Method

Intraday traders find it slightly more difficult to calculate stop loss using the support method than the percentage method. It is used by seasoned intraday traders. This method requires you to determine the stock's current support level.

An area of support is the area where the stock market stops falling. A zone of resistance is the area where it stops rising. Once you have determined your support level, you can place your stop loss point below it. Let's say you have stock trading at Rs500/share. Rs440 is your most recent support level. Your stop loss should be set at Rs440.

Support and resistance levels can be misleading. It's important to allow your stock to fall before you pull the trigger and exit. The support level will then rebound from the support level. You can set the support level slightly lower than the threshold to allow your stock to recover before you decide to exit the trade.

Calculate Stop Loss By Using the Moving Averages Method

For intraday traders, the moving average method is more straightforward than the support method for determining where to place their stop loss. A moving average must be applied to the stock charts. It is better to use a longer-term moving average as it will allow you to remove your stop loss from your trade without having your stop loss close enough to the stock price. Set your stop loss slightly lower than the moving average to allow for more flexibility in changing direction.

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