STOP LOSS -A weapon to minimize loss and protect the capital in stock market.
On losing trades many traders use “stop-losses.” Stock market’s trader/investor decide in advance how much of a loss they are prepared to tolerate on a particular investment or trade. If the market moves against them and reaches a predetermined price at that price, they have order to close their position and further loss is stopped. These technique is used by intra-day traders, day traders and also by investor. Intra-day traders clears their position in the market before the market closes, so the stop-loss for them is not that important, but still they can use stop-loss to minimise the loss.
If trader or investor buy the stock at Rs. 100 with a stop-loss of Rs.85, they know the maximum loss is Rs.15. There are also another factor which target to the limit the potential turn-back of profitable positions. With a “trailing stop-loss“, the stop-loss price rises in line with the market price. So if the stock rises by Rs.10 to Rs.110, the stop-loss can be also raise to Rs.95 instead of Rs.85. There is also another method of trailing the stop-loss, the stocks move making new supporting levels (bottoms) and resistance levels (tops). These ranges of moving prices always go in particular direction and new levels can be used as new price for the stop-loss.
Stop-loss is a most important disciplinary act for the trader/investor and the hardest trade to stop out. The stop-loss put the end on the hope created out of trade and no one like to give up a hope. Especially a new investor should be caution for mounting losses.
The benefit of stop-loss are very clear. When a position goes wrong it can cause stress to trader, but stop-loss helps him to remain calm and forces to be disciplined. A stop-loss also allows a specific amount of capital to be allocated to each trade and do not mount up the losses.
Sometimes, trader may hit the stop-loss and the market recovers. Don’t ever put off stop-loss by those experience. The horrible feeling of cutting a position only to watch the price turn and recover is one of the worst for a trader.
The decision to avoid the stop-loss : Giving up hopes is most difficult and hardest trade. So trader argue himself to avoid the stop-loss.
- Trader have enough capital in case of further losses.
- Trader remain confident that there will be a recovery, even though I understand the market reasons for the adverse price move.
- Trader hope and wait for a recovery after a fall in the market to exit the position in little loss or no loss.
Trader must admit to himself that things have not gone the way he was expecting. The decision to keep a losing position must not be based on emotion or on hope. Since trader has been wrong up to this point, there are lots of chances to go wrong again. There is old saying “the market can remain irrational much longer than you can remain solvent”.
Always use the stop-loss weapon to protect your capital and minimise the losses if the price hits the stop-loss level and cut the position in the market if: 1. the losses are threatening to the destruction 2. confused with the market movement 3. the fundamental are not supporting you.
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