Imagine you're a day trader who bought stock that you think will increase in value. Then you sell it to make a nice profit. You are now facing a loss because things start to go wrong before you even know. What amount of damage will you be willing to take before realizing it was a bad buy decision? You can limit your losses by placing a stop-loss or order. There is a possibility that you might be too cautious and lose your chance of making a profit when the prices rise again. It is possible. It is important to have the correct stop-loss strategy.
Your broker can issue a stop-loss order for you to sell the stock and exit the position once it reaches a certain price point. You can control the amount you lose on any trade by setting a stop loss. It is important to set a stop-loss at the right level so that you don't make risky or conservative decisions that could result in losing money. You also have the option of passive trading with stop-loss. You don't have to keep track of your trades every day. You can also let stop losses handle your trades while you're on vacation or on holiday. The downside
Some traders believe that determining the percentage of loss is important. An investor might place a stop-loss option at 10%. This means that the stop loss will kick in when the stock price drops 10% below the buy price. This is one of the most popular stop-loss strategies. Let's say you buy the stock of company ABC for Rs.100 per share. A stop-loss was set at 10%. Your stop-loss would be activated if ABC shares fall enough to touch Rs.90. To prevent further losses, your stock would then be sold at Rs.90.
It's not about being too cautious or not taking any risks. But if it is correctly placed, it can be used as an indicator that your price movements may have been in the wrong direction. You could also lose more if you don't exit at this level. A 10 percent rule allows stock prices to recover from a fall by giving them some breathing room.
Another strategy is to place your stop loss below the swing low when buying stock. The swing low is the lowest price range in which prices bounced back. It is followed by successive higher lows that create a V-shaped movement. If prices fall below the stop-loss level, it is possible that you have misinterpreted the direction of market. This can be irreversible.
You can also short-sell if you want to. Place the spot loss higher than the swing high. This is where prices bounce off, and are then followed by lower highs such as an inverted V shape.
To reach their stop loss targets, investors also use moving averages to their stock chart. The moving average represents the average daily stock price over different periods. It could be 15, 30, 50, 100 or 100-day moving averages. Stop losses can be placed below the moving average level. It is important to use a longer-term moving average to ensure that the moving average does not exceed the stock's original price. You could end up losing your position in a trade if you exit too soon, before the stock has a chance to recover.
It is crucial to choose the right day trading stop-loss strategy. This can either break your trade or lead you to lose opportunities.