Setting up or identifying stop loss…
Traders do not want to lose money when they are trading in the market.
Traders do not want to lose money when they are trading in the market. That's why it is important to place stop loss for the stocks one holds.
But every trader faces the problem of identifying the right stop loss level. Setting up stop loss for every trade at a particular price is in itself a good trading skill. Most of the traders must have experienced that the stop loss set by them always hits the target.
This compels them to exit from the stock. On the other hand, setting up stop loss at a higher level may result in huge losses.
Figuring out where to place the stop loss depends on one's risk appetite. End goal of stop loss is to maintain minimum loss. Few traders identify stop loss as a percentage.
Some traders usually maintain a percentage of two to three per cent. Stop loss shouldn't be measured as a percentage rather should be perceived as a particular area where the chances of stop loss being hit is minimal. The percentage method limits the stop loss at a specific percentage.
A trader who follows the support method identifies the most recent support level of the stock and places the stop loss below that level.
This method is a little difficult and only practice will help in identifying the right level. To know the right support for a security proper understanding of technical analysis is a pre-requisite.
Some traders identify the level of stop loss with the use of certain indicators. In the moving average method, the stop loss is placed below a longer-term moving average price.
The market moves in an upward and downward movement. So, the first condition to trade is to always buy a stock and place stop loss order simultaneously.
To understand the concept of stop loss we need to be trained in this area. Only a knowledgeable person can sustain in the market. A trader who trades ignorantly will face the brunt of the market.
Stop loss is another form of profit capturing and risk management. While determining stop loss every trader should evaluate their own risk appetite.
Since retracements are common in securities, they should be studied and analysed properly. Stocks that show retracements require more active stop loss and re-entry strategies.
So, know where you are going to place your stop loss when you invest in a specific security.
(The author is a homemaker who dabbles in stock market investments in free time)