A stop-loss order is used to mitigate the losses happening in the stock market. The order can be placed on both - the buy and sell orders. As you know the stock market is full of ups and downs and hence there is also a chance of falling stock.
If things happen exactly the opposite of what you think, then you need to do something to stop it right. Here, the term is known as a stop-loss order.
Let’s understand it with a suitable example: Suppose you have purchased a stock of Rs 100 and wish to go that stock high. If this is not happening, then you need to take some action to mitigate the losses. Here, the stop-loss order comes into play.
In the stock market, you can limit your losses by putting a stock loss order at 95. By doing this, you are placing it to stop a loss more than what you are ready to risk.
Types of Stop-Loss Orders
Stop-loss orders are of two types:
- SL Order Stop-Loss Limit = Price + Trigger Price
- (SL- M Oder Type) Stop Loss Market = Only Trigger Price
Case 1 > If you have a buy position, then you will place a sell SL.
Case 2 > If you have a sell position, then you will place a buy SL.
In Case 1 if you have a buy position at 100 and you wish to place an SL at 95.
SLM order type: With this order type, you must place a Sell SLM order with a trigger price of 95.
Then, when the price of 95 is triggered, a sell market order will be sent to the stock exchange and your position will be will settle at the market price.
SL order type: With this type of order, you must place a sell order with price and trigger price. Here your order must be triggered first, the trigger price is always greater than or equal to the price.
This order offers you a series of stop-loss limits.
Assume a range of Rs 0.10 (10 Paise). Here you can enter the trigger price = 95 and the price = 94.90.
When the price of 95 is triggered, the sell limit order is submitted to the exchange and your order is squared with the next available offer above 94.90. So your SL order can run at 95 (or higher) or 94.95, but not below 94.90.
The downside of this order is that if the market falls sharply, your Stop-Loss order is placed after the trigger of 95 and before the sell limit order of 94.90, if the share price is already below After 94, 90, your Stop-Loss order is still open and your losses could be much higher.
In Case 2, If you have a sell position at 100 and you wish to place an SL at 105.
SL-M Order Type: You place an SLM buy order with the trigger price = 105.
When the price of 105 triggers, a buy market order is sent to the stock exchange and your position is squared with the price market.
SL Order Type: Make a Buy SL order with price and trigger price.
Since your order must be activated first (the triggered price ≤ price). Here this type of order gives you a stop loss range.
Let’s assume a range of Rs 0.10 paise. Here you can keep the trigger price = 105 and the price = 105.10.
When the price of 105 is triggered, the buy limit order will be submitted to the stock exchange and your order will be squared below 105.10 on the next available offer.
Therefore, your SL order can be executed at 105.05 or 105, but not above 105.10.
Alternative use of SL Orders:
Since SL sell orders are used above their buy price and SL buy orders below their sell price, you can use these types of orders to buy via LTP (last traded price) and sell below LTP.
What are the Methods of Calculating the Stop-Loss in Intraday Trading?
- Percentage Method
- Moving Average Method
- Support Method
Percentage Method
This method is mostly used by intraday traders to calculate the stop loss. In the percentage method, traders are required to set the percentage price of the stock price they are prepared to lose before exiting the trade.
For Example: if you think that you would be losing 10% of the stock price before you exit your trade. Let’s say your stock is trading at ₹50 per share. Hence, your stop loss would be set at ₹45. This is because 10% of ₹ 50 is Rs 5. ₹50 - ₹45 = ₹5
₹5 under the current market value of the stock (₹50 x 10% = ₹5).
Moving Average Method
This method is comparatively easier than the support method to figure out where to set their stop loss. A moving average can be applied to the stock chart.
The moving average for the long term is better as it helps you keep your stop loss too close to the stock price. Once the moving average has been inserted, kindly set your stop loss just below the moving average level.
Stop Loss Using Support Method
In a support area, the stock price often stops falling, and in a resistance area, the stock price often stops rising. Once your support level is determined, all you need to do is set your stop-loss price point below the support level. For example, let's say you own a stock that is currently trading at ₹ 500 per share, and ₹ 440 is the last support level you can identify. It is recommended that you set your stop loss a little less than ₹ 440.
FAQs:
What is the Best Stop Loss Strategy For a Day Trading?
Don’t let a single bad day ruin your whole month. When you do intraday trading, there are so many things that go wrong. Successful traders know how to handle the situation and hence they know when to quit - they set and abide by a daily loss. According to stock market research analysts, the 3% rule is your maximum loss for the day; reduce this amount if you wish, but try never to lose more than 3% in a day.
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