Whais is Stop Loss Strategy in Day Trading?| Espresso

Stop-Loss Strategy In Day Trading

When you start investing in the share market, you will have bad days. And you can only become a successful trader when you can handle such days with confidence. Also, if you know the strategies well, you can save yourself from incurring major losses. A stock market is a volatile place for investors. It can assist you in earning profits or you may end up incurring huge losses.

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There are different situations when investors want to refrain from high losses and opt for a short-selling strategy. It is especially true for those day traders who recently bought a stock, but the market trend goes against their choice. In such a scenario, the best option to exit the trade is to make use of the stop-loss strategy.

What is a Stop-Loss Strategy in Day Trading?

When an investor is day trading, a huge percentage of risk is involved in the trend going against the investment decisions and they may incur great losses. In such a situation, the day trader can make use of the stop-loss order for a certain level of losses in number.
Also Read: What is Day Trading Margin?

Also, when the trend reaches a certain level of loss, the trade automatically gets closed so that there are no losses anymore. Of course, using the stop-loss strategy is a matter of choice and is not a compulsion for the investors. But using it can reduce the risks involved when there is no surety that the stock market trend will go upward or not.

The ‘Percentage Rule’ in Stop-Loss Strategy

Some investors believe in defining a percentage of loss. For instance, a trader may opt for the stop-loss order at 10%. The stop-loss will be triggered here once the stock prices reach 10% below the buying price. This is one of the most prevalent stop-loss strategies in the stock market.

So, if you have bought the stock of a company named XYZ at ₹100 per share and then you placed a stop-loss order at 10%. So, when the shares of XYZ decline enough to touch ₹90, the stop-loss strategy would come into action. And you will be able to sell off the shares at ₹90 without incurring any more losses.

Take Risks But Be Cautious

In the share market, the idea of a stop-loss strategy doesn’t mean that you will not take any risks while investing. However, you will have to be overly cautious and place the stop-loss order in a way that would ensure you do not face major losses. Because in case you cannot place your stop-loss strategy well, you end up making more losses than ever. This is why the ten percent rule works well and will also help you manoeuvre the risky terrains of the stock market with ease.

The Concept of Resistance and Support

The key benefit of making use of the stop-loss order is the assistance and resistance theory in the stock market. With the help of the 10% rule, the trade will be completed when the trend touches that particular threshold for avoiding further losses. Moreover, this stop-loss strategy supports the traders by helping them avoid losses in case the trading goes wrong or when the trend goes against them in day trading.
Also Read: Intraday Trading Strategies

Conclusion

The stop-loss strategy comes into existence in the share market when the market trend goes against the trading decision by exiting the trade at an edge. So, this could be a good option for the investors to avoid losses after a certain dip in the share prices. However, the investors often consider the stop-loss order with the swing low and high for avoiding major losses as they have risk attached and may incur more financial losses than ever.

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Frequently Asked Questions

Most traders use the ‘percentage rule’ to set the value of a stop-loss order. Here, the 10% rule works the best.

In a trailing stop-loss order, the threshold point is placed from the beginning, and over which, if there is an increase in the market losses, it will execute and bring the investor out of the trade. But unlike the stop-loss order, it does not have a fixed number and may change as and when the market trend goes downward or upward ensuring the risk is slightest.

No. The stop-loss strategy value will not be affected by the changes in stock market trends. But the trailing stop-loss order can fluctuate and could be influenced by market trends.

A stop-loss order is used to avoid further losses in the stock market when the market trend goes against the trading decision of the investors. This strategy comes into work automatically by leaving the trade at a certain point of threshold.