Why stop loss plays a major role in day trading?
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Benefits of Stop-Loss Orders
Once you place a stop-loss order, it’s like setting an alarm. If the stock price hits that particular level, the software automatically sells the stock at the given price. You don’t have to be active on the market.
Emotion is the drawback of most of the beginner traders. A stop-loss order has zero emotions. It executes the trade without any emotion.
Stop-loss also helps you manage risk. Traders must have a clarity on when to take trade, target price, and the stop-loss price. Based on his calculations and strategies, he has to place the target and stop-loss orders immediately after executing the trade.
Stop loss protect your capital from huge losses, so that you can stay in the market over a period of time.
You can even adjust stop-loss levels based on the stock’s performance. As the stock price goes up, you can move the stop-loss higher to get more profit.
Peace of Mind:
Stop-Loss orders provides peace of mind to the trader, knowing that your capital is protected. Even if the market is volatile, you have a safety mechanism on work.
In simple words, a stop-loss order is like a seat-belt while driving, it keeps you safe from huge losses.
How do you Use STOP-LOSS Order
The word “STOP-LOSS” itself indicates that it helps you to stop losses in the stock market.
A stop-loss order is like a safety net for your trades in the stock market. It’s like a helmet to a bike rider.
Now, I will explain how it works and why it is helpful in trading, especially in intraday & swing trading.
For example, you bought a stock at 100 rupees, and you hope it will go up to 104. But if the stock starts going down instead, a stop-loss helps.
In this example, if your stop loss order is placed at 98, if the market get reversed and went till 85 is not an issue to you.
Your total loss in that trade is 2 rupees per share but without a stop loss the loss will be around 15 rupees per share.
Beginners who trade intraday and swing trading avoid using stop loss orders instead they lose their capital in a couple of days.
Why Stop-Loss is Important?
As we have deep-rooted emotions, our minds may not accept the loss and we always hope for the best to happen. But the hard core fact is it will never happen in most of the cases and as a consequence, we lose the entire capital in no time.
Here the stop loss cuts our losses down as the system doesn’t have any emotions.
As a beginner, it is very important to keep a stop-loss immediately after taking a trade. One must know the target and the stop loss before taking up the position.
To make a safe play in the volatile state of stocks at BSE/NSE during the day, the stock exchange provides a facility to put stop loss order.
The stop loss allows the broker to sell the stocks at the given price and the prevention of further losses possible.
For instance, during an intraday trading activity an investor who makes an entry and buys 10000.00 worth of stocks with a share price of Rs.100.
The stock so bought may begin to fall in price and as the level of fall in price is uncertain, the investor can set a price which signals the broker to put it for selling.
Here if the trader sets the stop loss at Rs. 95.00 then the bought stocks are sold out at Rs. 95.00 and further decline in prices shall not affect the investment of the investor.
Although this stop loss protects the investor it will cause a dent and create a loss. From this one thing is evident, to make huge profits in a day trading it will be a tightrope walk.
Hence investors must never dream to earn huge amounts Intraday trading and invest on long term plans instead. In a race to make quick and huge money one may lose peace of mind, and go panic during trading hours. At times this might collapse the investor and risk life as well.