Stop Loss is a value set by the trader while doing trading in order to fix it loss or profit, by using stop loss he is actually reducing his risk and fixing his loss or profit.
How does it work?
The shareholder determines the limit of stop loss. For example, suppose if you bought a stock for ₹ 1000, but you believe that it may fall, then you will tell your broker that if the stock price falls below ₹ 950, then sell it.
So in that case, your stop loss is ₹ 950. And if the stock prices fall below ₹ 950 it won’t affect you as your stop loss is already hit at ₹ 950.
Not only at the time of fall, but it also works even when stock prices are increasing. For example, tell your broker about the same stock bought at a price of ₹ 1000, that if the stock reaches at ₹ 1100 then it will be sold.
What beginner does mistake?
When a person starts his trading as a beginner most of the time he forgets to put stop loss over trade, and sometimes he does not change stop loss according to trade and time, will result in not book his profit on time and may lead to a huge loss.
Importance of Stop Loss
Stop loss is used to minimizing the loss of a trader and helping in making a risk to reward strategy.
In such a way, the more benefits it may have, the more damage it can occur. Stop loss is a mechanism to reduce the trader’s loss.
Also, One more benefit of this is that if you are not trading on a regular timely basis and there is no need to routinely monitor it, it can also be beneficial for you. In such a situation, this mechanism helps you to save from big losses.
Stop loss is very important for a short period or we can say for the Intraday traders, but if someone has to invest for long periods then there is no meaningful importance for it. You should be prepared for yourself that there can be a big change in the market at any time in order to get huge profits.
Read,also Is Face Value Worth in Stock Analysis?
How to use it Properly?
For any trader stop loss is mandatory, but most of the trader, when they are in beginning state, don’t use it properly As they are not maintaining their risk to reward ratio.
Before taking any trade must fix your risk to reward ratio and you can change it according to market fluctuations and change stop loss accordingly.
Maintain 1:2 risk to reward ratio or any what suits you and put stop loss accordingly.
Stop loss seems simple tool ,but it is a very important tool for any trader and if you are a trader, you should use stop loss in order to fix your risk to reward ratio, and you can also fix maximum profit on your trade by putting stop loss at upper point as you can easily check out whenever your stop loss gets hit.