Role of stop loss in stock market
The stock market fluctuates very strongly, just being neglected for a second can cause investors to face serious financial losses. Stop loss is a measure to prevent further losses.
Stoploss is one of the important stages of investment and short-term trading, and shows the point till which you can bear the loss.
When you open a position with Rs. 10 000, how much loss from this position can you bear? Rs300, 500 rupees or 1000 rupees?,you need to decide and place your stoploss accordingly.
What is stop loss?
Stop loss is an automatic stop-loss/stop-loss order that is pre-set in trading orders to minimize risk and limit losses to a limit price in case the market moves against you.
When the stock price hits the stop loss, the order will automatically close immediately, the loss amount will stop there and then deducted directly from the ltrader’s account.
For a buy position (Buy order), the stop loss will be placed below the matching price and below the important support area.
As for a sell position (Sell order), the stop loss order will be at a price higher than the matching price and above an important resistance area.
Placing a stop loss order helps investors to limit exposure to the maximum, control their psychology of loss and do not need to monitor orders regularly. There are two types of stop loss orders: sell stop loss and buy stop loss order. The downside when placing a stop loss order in the short term may be that investors will miss out on a profit if the price reverses up/down again.
To place an SL order, there are 5 steps: determining the entry point, determining the specific position to place the order, determining the amount of loss that the trader is willing to accept, calculating a reasonable trading volume, and executing the order. Avoid placing the stop loss order too close or too far, should not drop or move the stop loss compared to the original calculation. To determine the stop loss level, stick to technical indicators, price models or depending on the amount of capital you have, do not exceed 1-2% or depending on market fluctuations to decide.
Different methods used when putting a stoploss
– You can put it in the form of currency. With a straight logic, I put an 800 Rs stoploss on my 15 000 Rs buy position, if I lose 800 Rs, it’s like I’m out of the position.
– You can put it as a percentage. I’m okay with 10% loss. 2000 Rs against a buy position of 20000 Rs
I agree with the loss. I can exit the position with a loss of 2000 Rs.
– A stoploss can be placed based on the volatility seen in the market. In this regard, help can be obtained from indicators showing market volatility. For example, if the share price is 1.50 and the volatility seen in the market at that moment is 0.12, I will close my buy position in case of a 0.12 decrease in the price.
-Selling when the price drops below the lowest price the day before. The lowest price seen yesterday is 1.28, it is now 1.32, if the price drops below 1.28, I would sell.
– selling if prices fall below this level by averaging the lowest prices seen in the last 5 days.
Here, your risk acceptance potential and the dynamics of the instrument you invest in are important.
After determining the buying point in both short-term trade and long-term investment, the second stage that needs to be decided is the stoploss level. It doesn’t matter which market you are investing in, whether forex, equity or commodity.
The selling point is more important than the buy point in the movement that will make you money when the position is opened. We will examine this in detail later on.
What is the benefit of stoploss?
-Stoploss shows you that something is wrong. Why stay in position if something is wrong?
– It allows you to get out of the position you have taken with less damage. The market is not going anywhere. You’ll still get it if the dynamics change.
-The most important pillar of the trading strategy you have established is the stoploss. Because the stoploss shows you the risk you take.
-When you enter the market, you need to avoid losses as much as possible in order to increase your capital steadily.
No one can make money without losing money. This is contrary to the nature, operation and logic of the system. Then what you need to do is to determine your damage level in advance.
An investor who does not set a stoploss and does not sell when the price falls in the stock market, will take a bad hit and withdraw from the investment area one day.
You need to check the level of success by trying the stoploss method you will apply in the past.
The stoploss you put should be at a level that will not remove you out of the position in the normal fluctuation of the market, but in a way that will not cause great losses.
Human nature is that we do not want to be harmed. While the prices are falling, your loss will increase from moment to moment on the screen and this will start to bother you after a certain point. You are hurting. You are defeated. You are losing money. Your purchase decision was wrong. In this case, your hand will not be able to go to the sell button.
But there is a truth. Why would you hurt more? It’s easy to spot a stoploss, but it’s really hard to sell at a stoploss. I generally recommend this. Familiarize yourself with the stock before purchasing large quantities. Buy less, but buy good stock. Get a habit.
Putting a stoploss is like buying insurance for 2000 Rs for the car you bought for 70 000 Rs. It is similar to making earthquake insurance for the house you bought.
What will happen if stoploss is hit immediately after I buy it?
If it is hit soon, you can buy it again. Why did you buy the stock you intend to buy? my basic data was solid, it was breaking my resistance, it was my support. Why won’t you buy the stock you trust? The purpose of the stoploss is to prevent you from making more losses when an unexpected situation is encountered.
There are many who lose their capital by not putting a stoploss. Not every buy position you open will result in loss.
So keep investing with a stoploss.
