Stop Loss

Key Highlights

• A stop loss is a tool that helps traders limit their losses. It automatically sells a stock when it reaches a certain price, protecting against big drops in value.

• Types of stop loss include fixed and trailing stop loss.

What is Stop Loss?

A stop loss is a tool that helps traders limit their losses. It automatically sells a stock when it reaches a certain price, protecting against big drops in value.

How Stop Loss Works?

Setting a Stop Loss: You choose a price where your stock will be sold if it falls that low.
Example: If you buy a stock at ₹100 and set a stop loss at ₹90, it will be sold if the price drops to ₹90, limiting your loss to ₹10 per share.

Types of Stop Loss

1. Fixed Stop Loss: Set at one price and doesn’t change.

2. Trailing Stop Loss: Moves with the stock price.

Example: If the stock rises to ₹120 and you set a 10% trailing stop, it will sell if the price drops to ₹108 (10% below ₹120). This locks in profits while limiting losses.

Why Use a Stop Loss?

• Limits Losses: Prevents bigger losses by selling automatically.

• Reduces Stress: Avoids emotional decisions during trading.

• Saves Time: No need to constantly watch the market.

Stop Loss: Common Strategies:

1. Percentage Rule: Set the stop loss at a fixed percentage (like 5% or 10%) below your purchase price.

2. Support and Resistance: Place stops just below support levels (for buying) or above resistance levels (for selling).

3. Moving Averages: Set the stop loss slightly below moving averages, like the 50-day average.

4. Swing Highs and Lows: Base it on recent highs or lows to catch trend changes.