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Stop Loss order in Intraday trading

2 Mins 05 May 2023 0 COMMENT

Investing in the stock market is a good way to earn money but it is risky! In the same way, intraday trading is also subject to the same rules. However, if you want to minimize the risk of suffering a large loss, then you can opt for a good exit strategy or a stop loss order. However, before we go into how a stop loss works, let us first take a closer look at what a stop loss is.

The purpose of this trading strategy is to help intraday traders limit the losses they incur as a result of their trades. So, it works as an advance order to set a command to exit your position if the share price reaches a certain level. Think of it as automating the closing of your open positions before you find yourself in a tight spot. You will still be aware that for stock marketers two aspects are very crucial to them; these are making profits and protecting capital.

Three different methods can be used in determining a stop-loss strategy, and they are:

  1. Support and resistance levels:

    Stock close and highs are defined by these technical indicators.

  2. Using other technical indicators:

    In addition to the support and resistance levels, you can also set the level by using either daily or weekly moving averages as a guide.

  3. Percentage:

    As far as your stop loss level is concerned you can choose to set it at a percentage of loss that you can afford.

Besides these three strategies there is also a trailing stop loss strategy often used by long-term investors which can help you protect your profit. All that needs to be done is to set a stop loss limit at a level where your profits will be protected at all times. So guys, I really hope that one of these strategies will be able to help you in some way make sure to invest wisely and also be sure to set up your own stop-loss strategy so that you can minimize your losses.

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How to do Risk Management on Your Trading Strategies?

It is humanly impossible to be 100% correct in all trades, irrespective of how thoroughly we research stock markets. This is why we must think about limiting the risk undertaken for each trade. Moreover, knowing where to draw the line helps you refrain from overburdening yourself.

In that case, what should be your risk tolerance? Let's find out. The most commonly recommended rule by experts is the one percent rule. This means that a stock trader must not lose more than one percent of his total position value in a single trade. So, if your account holds positions worth one lakh, your maximum loss per trade should be within one thousand. That's why you should always place an appropriate stop-loss on your trades. You should adjust your position size as per the loss amount predetermined by you. Position sizing involves calculating the number of shares, lots, or contracts you will trade based on your predetermined risk per trade. For example, if you are buying a particular share at rupees 100 and keep a stop-loss at rupees 95, your loss per trade is 5, and hence your position size will be 1000 divided by 5, which is 200 shares.

How much risk you take depends on how comfortable you are with the potential loss of capital. This is why some traders also push their risk tolerance to two percent. But how does this slight change make a difference? Let's say A has a position of rupees 50,000, whereas B has rupees 1 lakh. A uses a threshold of two percent, whereas B uses one percent. This effectively means that both A and B will lose 1000 per trade, despite the sizeable difference in their account balance. As both have different levels of risk tolerance or risk appetite.

While mentioning risk tolerance, it is also important to mention emotional control. Greed and fear are the two emotions that you have to deal with strongly. You should always exit the trade when your maximum affordable loss has been reached. Holding on to a loss-making trade with the hope of recovery can deepen your losses. A risk management strategy in stock trading is as important as a sail is to a boat. If the price moves opposite to your expectations, you should recalibrate and exit your position without much delay. It's generally recommended to avoid risking a significant portion of your total capital on a single trade. Diversification is key to risk management. Consider allocating a fraction of your overall capital per trade, such as one percent to five percent, to ensure that losses on individual trades do not severely impact your portfolio.

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