What is Stop Loss?
A stop loss is the point or price beyond which if the current price of the stock goes, then you reverse your earlier position. A stop loss order instructs your broker to sell when the price hits a certain point or price. The purpose of stop loss is that you want to get out of the stock before it falls any further and it indicates maximum loss you are willing to absorb.
Suppose you have made some long position on any Equity or any other instrument expecting bullish trend in it. What if your prediction goes wrong and share prices starts falling.
That time Stop loss comes to your rescue, if you have already put an SL at some lower price according to your risk appetite, your loss will be booked at that price and you’ll get anticipated loss which much better then sudden losses that too huge.
Trailing Stop Loss
Stop-loss orders are traditionally thought of as a way to prevent losses thus its namesake. Another use of this tool, though, is to lock in profits, in which case it is sometimes referred to as a “trailing stop”. Here, the stop-loss order is set at a percentage level below, not the price at which you bought it, but the current market price.
The price of the stop loss adjusts as the stock price fluctuates. Remember, if a stock goes up, what you have is an unrealized gain, which means you don’t have the cash in hand until you sell. Using a trailing stop allows you to let profits run while at the same time guaranteeing at least some realized capital gain.
Stop Loss for Fresh positions
Suppose if you want to buy some stock at a price above current market price you have to keep an eye on the price continuously until it reaches that price and still there are good chances that miss buy opportunity at that rate due to quick movement or price jump.
In such case you can keep SL Order to Buy or Sell new positions and you don’t need be keep tracking that stock as it’ll buy or sell automatically when the given price get triggered.
All Stop loss trades are conditional means only if the price gets triggered then only it will activate your opted trade till then your position will remain safe.
Sense of Fearless
Stop loss order gives you some sense of Fearlessness which is quite important for trading. Sometimes in a panic suppose you clear your position in some minor loss or profit or even nearby your cost and later the trade goes in your predicted direction without touching your Stop Loss or going below your risk level in case you did not keep SL.
If you are practicing SL regularly then you have already decided that much loss in your mind which gives you much relaxed feeling to stay with that trade.
Sometimes you’ll be stopped out, but other times, you will save your capital. Over time, you’ll get better at setting stop loss strategy. Eventually, you will be able to have a sense of each trade, and set the stop loss strategy that work best for you.
Stop loss orders work like insurance policies that cost you nothing but if your call on the market goes wrong then they can save a fortune. If you are not willing to hold on to the stock forever, then it is always advisable to have a stop loss to limit your losses in case the price of the stock moves opposed to your predictions.