What is a Stop loss order?
In simple terms Stop loss is an automatic order set by the trader to minimize his loss. For instance, we buy a stock for 1000 rupees; if it goes above 1000, we can book a profit, but there’s a possibility that the price may go below 1000 as well, it could go down to 950, 900 or even to 800.
But if we set our stop loss at 950, we can limit our loss, this means the system will sell our stock automatically as soon as the price hits 950. That way we lose just 50 points even if the market goes further down.
But if the market goes up, above 1000, we can book our profit. Also, when a stop loss is placed for a product, the price fluctuation of that script must be taken into consideration. For this you need to know how to set stop loss spread. Spread is the minimum difference that you wish to maintain between the market price and stop loss order trigger price. But, for every script the spread set would be different as the price movement varies from script to script. For instance, let’s take crude oil…there’s a leap of 10 to 20 points in the market.
So when we set a stop loss at such a time and the market price and the trigger price are set at the same value, there’s very little possibility for the order to get executed as there could be a leap here.
Stop loss is an automatic order set by the trader to minimize his loss.
Spread is the minimum difference that you wish to maintain between the market price and stop loss order trigger price.
Trigger price is basically like an alarm.
It’s important to place the SL and SLM based on the market volatility.
Stop loss is like insurance which helps to protect your capital from possible loss.
Now remember, when you take a buy position, you must place a sell Stop loss. But if you take a sell position, you must place a buy stop loss.
Now look at the display how to set a stop loss for crude oil in Enrich Web hunt /p>
For instance, we have a sell order for 1840 in crude oil. Our stop loss is 1860; we click SL and the stop loss price we have set is 1860 and the trigger price is set for 1850. As there’s a leap of 10 to 20 points in crude oil, we have set at a difference of 10 points here. If we place the price and trigger price too close, this would minimize the possibility of order execution. Trigger price is basically like an alarm. When the price hits 1850, it gets activated and an automatic instruction is given to the market that 1860 is my square off price. Now if the market price touches 1850 and reverses, the order will not be executed, and 1860 stop loss order will remain pending.
Now SLM means stop loss market. Here only the trigger price can be set. For instance, we set the trigger price as 1830. Now when the price reaches 1830, the order gets activated and an automatic instruction is given to square off the position at the market price.
When we set SLM, the order gets executed at the highest price quoted,so there is a possibility for huge loss as well. Hence, it’s important to place the SL and SLM based on the market volatility.
Now let’s have a look at the depth market for crude oil. Here we can view the first five buyers and first five sellers..you can see their price here…but all these prices are closed prices with a difference of one rupee…and all the prices after this would be with more difference….that’s why if we place a very small amount of spread…there may be a buyer at that price or may be not…this would minimize the possibility of order execution.
So we have seen how to place a stop loss and how to set spread right…
Now let me share with you some techniques and strategies to follow when you place stop loss.
The first technique to follow is never to set stop loss in round figure because there’s a high probability that it will hit at that figure. For instance, if you decide to set a stop loss for 1500, always set the stop loss at figures like 1496 or 1497. As 1500 is a breakout point. Here the market would give a negative indication…so market may go down a bit.
Also another important point to note is that usually we place stop loss based on the amount that we have invested….but this is not the right thing to do. You should fix your stop loss based on your entry point and the market volatility.
First you need to calculate the profit and loss ratio.
For instance: 1:1, 1:2 or 1:3
1:1 means you get one rupee loss for one rupee profit
1:2 means two rupees profit for one rupee loss
1:3 means three rupees profit for one rupee loss
So if you trade in 1:2….you make profit in one trade and even if the stop loss is activated twice, your capital would be secure. Likewise for 1:3…. if the stop loss is activated three times, your capital would be safe. So remember to trade based on the ratio.
Stop loss is like insurance which helps to protect your capital from possible loss. Usually out of 20 days of trading we may make profit for 15 days but if you fail to set the stop loss even for a single day… you may lose all your investment in a single day. In order to prevent this, you need to be disciplined and professional in your trading by calculating the profit and loss ratio and decide your entry and exit points before trading.
There are many trading opportunities in the market, but your capital is safe only if you carefully set your stop loss and trade wisely.