The Stock Market is a highly volatile field, and where it can help you earn more profit, it can also incur heavy losses. There are many situations when traders want to avoid high losses, such as when using a short-selling strategy, and it is true especially with the day traders who have just bought a stock, but the trends go against their decision. In such a case, the best viable option to exit the trade is to use the stop-loss trading strategy.
When one is day trading, there is a huge risk of the trend going against the decisions and can incur huge losses. The day trader can use the stop loss order strategy at a certain level of losses in number, and when the trend of losses or downward trend reaches this point, the trade is closed automatically to avoid any more losses. It is not a compulsion to use the stop-losses trading strategy and is a personal choice, but it eventually reduces the risk of higher loss when there is no expectancy that the trend shall go upward at the end of the day.
Suppose a stop-loss order point is set at the Rs. 70 per stock, which is priced at Rs. 100; if the trend of losses reaches the point where the price is about to go below Rs. 70, the trade is automatically closed or exited to avoid any more losses. Meaning, the trader is risking Rs. 30 as loss per stock, and the stop-loss point or threshold never changes on its own despite the trend changes.
There is another type of stop-loss order known as a trailing stop-loss order. In such a strategy, the threshold point is set, and above which, if the losses increase, it can execute itself and bring the trader out of the trade. But unlike the stop-loss strategy, it is not fixed on a certain number and changes as the trend goes upward or downward to ensure the risk is minimal.
It is a personal choice to use a stop-loss order strategy in day trading and what is more important is to set the right value for stop-loss orders. Stop-loss avoids losses below a certain level in the trend and executes the trader out of the trade, but if the right value of the stop-order is not set, it is only leaving a window open for the losses to grow and is more conservative and risky where the day trader ends up not having any profits at all. Most of the day, traders set the stop-loss value above the price they have bought the stock when the trend is booming upwards. In such a case, if the trend falls or there is a downtrend, the trader at least has some profit in the pocket.
Besides, a trader can leave the trade for a particular day while he/she knows there will be no losses or minimal losses due to stop-loss orders when they are busy having a vacation or on a trip.
It is common to have such a question one is trading, how much to set in stop-loss order? Most of the traders use the percentage rule to set the value of the stop-loss order. Usually, the one who wants to avoid a high risk of losses set the stop-loss order to 10% of the buy price. For example, if the stock is bought at Rs. 100 and the stop-loss order value is set to 10% (Rs. 90), in such a case when the price reaches Rs. 90 and is about to go lower, the stop-loss order is executed, and the trade is closed at Rs. 90. This ensures there is no huge loss when the stock is traded, or the transaction is performed.
Another strategy associated with how much to set up on stop-loss order is a swing low and swing high. In the low swing strategy, the stop-loss order is placed at a point where the trend is expected to bounce back from a downward trend to an upward trend leading to the V-shape in the chart. This is risky because if the chart does not bounce back in the V-Shape, it is only the losses that incur to the trader. The high swing strategy fits in when the trader is short-selling the trades. In such a situation, the stop-loss order is set to a slightly higher price from the selling price to ensure there are no higher losses. Theoretically, such losses are infinite, and a stop-loss order can ensure there is a minimal risk.
The major benefit of using the stop-loss order is the support and resistance that the day trader can avail to avoid heavy losses, especially by using the 10% rule on the stop-loss that resists more losses. When a 10% stop loss is applied, the trade is executed when the trend reaches that particular threshold to avoid any more losses. Moreover, the stop-loss strategy also gives support to the day traders by stopping losses when the trader has made a wrong decision, and the trends go against them.
Final Words
A Stop-loss strategy is used to avoid more losses when the trend goes against the trade decision by automatically exiting the trade at a threshold point. It is a great option and is a personal choice for day traders to use and avoid losses after a certain price dip. Stop-loss order strategy is often used with the swing low and high to avoid more losses as they are risky and can incur more losses than usual.
A Stop-loss strategy is used to avoid more losses when the trend goes against the trade decision by automatically exiting the trade at a threshold point.
No, stop-loss order strategy value is not influenced by the changes in market trends. However, the trailing stop-loss strategy is variable and is influenced the market trends.
In the trailing stop-loss strategy, the threshold point is set, and above which, if the losses increase, it can execute itself and bring the trader out of the trade. But unlike the stop-loss strategy, it is not fixed on a certain number and changes as the trend goes upward or downward to ensure the risk is minimal.
In the low swing strategy, the stop-loss order is placed at a point where the trend is expected to bounce back from a downward trend to an upward trend leading to the V-shape in the chart.
Swing high stop loss strategy is used when the trader is doing short-selling. In this strategy, the stop-loss order is set to a slightly higher price from the selling price to ensure there are no higher losses. Theoretically, such losses are infinite, and a stop-loss order can ensure there is a minimal risk.