Stop-loss (SL) can be defined as an advanced order to sell an asset when it reaches to a particular price point. It is used to limit loss or gain in a trade. It helps in risk management.
A stop-loss order is an order placed with a broker to buy or sell once the stock reaches a certain price.
Case 1 > if you have a buy position, then you will keep a sell SL
Case 2 > if you have a sell position, then you will keep a buy SL
For example, if you bought a share of Wipro at Rs.100 and you need to limit your loss up to Rs.1 so, you need to put 99 as stop loss. If at all stock price hits 99 then your order will be trigger and loss will be booked. If stop loss holds trade will continue and you can book profit at higher levels if it comes.
You will place a Sell SL order with price and trigger price. Since your order needs to be trigger first, the (trigger price ≥ price.) Here, this order type gives you a range of Stop-Loss. Let’s assume a range of Rs 0.10 (10 paise). Here, you can keep trigger price = 99 and price = 98.90. When the price of 99 is triggered, the sell limit order is sent to the exchange and your order will be squared off at the next available bid above 98.90. So, your SL order may get executed at 99 or 98.95 but not below 98.90.
The stop loss is a very effective tool in volatile market especially for intraday trading.
Trailing stop loss
a type of stop-loss order that combines elements of both risk management and trade management. Trailing stop loss are also known as profit protecting stops because they help lock in profits on trades while also capping the amount that will be lost if the trade doesn’t work out.
For example, you have bought a stock of Rs.100 with an initial stop loss of 99 and it starts moving up. After some time, it moves to 101, so you can modify your stop loss upwards to 100.5 So even if stop loss hit at 100.5 you will not lose anything. It is a good strategy for capital and profit protection. In fact, you will gain Rs.0.50. Per-share even if stop loss hit and if stop loss does not hit then you can continue to trail your stops upwards until it hits.
Trending the breakouts using stop loss :
Some traders want to trade on the breakout. So, they prefer buying the above the breakout point or selling below breakdown point. For them, advance buy trigger or advance sell trigger can be placed. For example, the stock is facing multiple hurdles around 100. So, such traders will prefer to take entry after the stocks cross the hurdle of 100. So, they will place trigger order (advance buy order) around 101.
Stop hunting :
Stop hunting is a strategy that attempts to force some market participants out of their positions by driving the price of an asset to a level where many individuals have chosen to set their stop-loss orders. The triggering of many stop losses at once generally leads to high volatility and can present a unique opportunity for traders who seek to trade in this environment.
For example, assume that ABC Company’s stock is trading at Rs.101 and looks as though it may be heading lower. It is possible that many traders will place their stop losses just below 100, at 99.9, so that they can still hold onto the shares and benefit from an upward move while also limiting the downside. If the price falls below 100, traders expect a flood of sell orders as many stop losses are triggered. This will then push the price lower and give some traders the opportunity to profit from the decline and perhaps even open a bullish position on an expected rebound to the previous range. Many algorithms traders are checking at which levels major sell orders or buy orders are placed.
Stop loss in the stock market is extremely important as it will give you another chance if the first attempt is failed. For example, if you bought the stock at Rs.100 and hold without stop loss. Suddenly the price falls to 90 and then 80. 20% of your investment amount will be wiped out in single trade. On the other hand, if you place a stop loss of 95 then it will be trigged in this case with only 5% loss. So, in this process, a 15% loss will be protected. You can take entry in other stock to recover the loss with another 5% stop loss. Many people suffered losses because of investing without stop loss. In some cases, loss is more than 80-90%. Some recent examples are YESBANK, DHFL, PNB & many more.To avoid such losses Stoploss(SL) is must for investment as well as trading.