How to Use Stop Loss for Effective Intraday Trading?
What's the one thing in common between trying your hand at a casino and intraday trading? Surprisingly, none! You may have heard people connecting the two activities, but stock market trading involves risk as well as choice. While in a casino, you may have almost negligible ways of mitigating losses, you can employ stop loss strategies to place the odds in your favour with trading. Simply put, when intraday trading in the stock market, your exit strategy or stop loss order ensures you do not stare in the face of a large loss.
What is Stop Loss?
Stop loss is a trading strategy that helps intraday traders limit their losses. It works as an advance order to set a command to exit your position if the share price reaches a certain level. Consider it as automating the closing of your open positions before finding your trades in a tight corner. Employing stop loss can ensure you do not incur heavy losses in intraday trading.
Let’s understand this with an example. For instance, say you purchased ABC stock at Rs. 100 per share. You don’t want to risk more than 10% of your investment. So, you set a stop loss order at Rs. 90, or a loss of Rs. 10 per share. If the price of ABC drops to Rs. 90, the stop loss order will be executed.
On the other hand, let’s say you have shorted ABC shares for Rs. 120. Once again, you are willing to take a maximum risk of 10%. If the share price increases to Rs. 132, your stop loss order will come into effect at that level, thereby booking your loss of Rs. 12 per share.
Stop loss also works well for positional trades to limit losses or secure profits.
Additional read: Things to Know While Doing Intraday Trading
Why Have a Stop Loss Strategy?
Two aspects must be crucial for a stock market trader - making profits and protecting capital. If your capital erodes, you will not be able to trade. A stop loss strategy ensures your capital is protected to some extent even if the market moves against your predictions.
How to Determine Stop Loss for Intraday Trading?
There are various approaches to determining your stop loss strategy. Here are some ways to decide, you can choose a method right for you:
1. Support and Resistance Levels
Support and resistance levels are technical indicators that define the low and high points of a stock. You can use support and resistance levels to determine your stop loss strategy. If you are going long on a trade, you can set the stop loss at the next support level. If you are shorting a stock, you can set the stop loss at the next resistance level.
2. Other Technical Indicators
Apart from support and resistance levels, you can also use other technical indicators to set your stop loss in a trade. For instance, you can use daily or weekly moving averages to set the level. You can place a stop loss below these moving averages.
You can also choose to set your stop loss level at a percentage of loss affordable to you. As in the example provided above, if your risk appetite allows you to stomach a loss of up to 10%, look to setting the stop loss at 10% for a long or short strategy.
Additional read: What is Swing Trading and How You Can Benefit from It?
Using Trailing Stop Loss Strategy
A trailing stop loss strategy can be used to protect your profit. You can set a stop loss limit at a level where your profits are protected. Very often, long-term investors use trailing stop loss to secure their gains.
A stop loss strategy in intraday trading helps limit your downside risk, give protection to your capital and instil trading discipline. You can also use stop loss effectively to protect your gains to a certain level. As a smart investor, look to set your own stop loss strategy for a successful trading journey.
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