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 OFFLINE | Stop losses are very important for successful stock trading. However, very few stock traders tend to realize their value. The result-they end up making huge losses in a very short period of time. This section will put forth some facts about stop loss orders.
Facts About Stop Loss Orders
Stop loss orders can be very useful to book our profits in a volatile market. They are more useful for the short term traders and those indulging in the day trading activities. Whenever you fix a stop loss at a certain price, your shares will automatically get sold at that price, thus protecting your losses if the price goes below your purchase price. Though understanding the concept of stop loss is easy, practically implementing it in your daily trades and knowing where to fix the stop losses is a bit challenging. However, practice and stock research can solve most of your problems.
While fixing stop losses, we have to be very careful as they can wipe out our profits if fixed at the wrong price. It happens many times that the stock price goes on declining sharply. But, the stock can find some support on the downside and bounce back from those levels to continue its upward journey. So, if your stop loss gets triggered, you will not get the advantage of the upward rally in the stock after the small correction.
When the price of a stock is consistently going up, you need to have a trailing stop loss to lock your profits. Now, what is a trailing stop loss? In simple words, the trailing stop loss is fixed at a price which is around ten percent lower than the current market price of the stock. So, till the stock price goes up, you continue to bring the trailing stop loss up. The moment it starts sliding due to profit booking by other traders, your shares will get sold at the stop loss price. Trailing stop losses are a must if you are a day trader and have the challenge of ending the trade in a single day.
In case you have built a short position in the market, then your stop loss should be a few percent above the current market price of the stock. In short selling, we sell the shares first with the aim of buying them at lower levels when they fall. A stop loss at a higher level will ensure that the share price does not go up significantly and not cause us a loss. Short selling is generally done in a bearish market which shows signals of extreme weakness. Stop loss orders are to be placed with your stock broker when you buy or sell the shares. There are many brokerage houses which suggest what should be the stop losses on different stocks. However, self research always pays in the long run. By studying the technical charts of stocks accurately and plotting them yourselves, you will be able to understand the resistance points and support points which help us determine the stop losses precisely.
By now, you must have understood what is a stop loss order and what is its advantage. By chalking out effective trading strategies, you can emerge as a winner in the stock market. So, give it a serious try and do well!
DISCLAIMER: This article is just for reference purposes and does not recommend any stock market transactions. |
What is a Stop Loss Order
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