How to use Stop Loss order in Trading

By | December 11, 2012

When markets are

  • Volatile
  • Overbought in Short Term
  • May Reverse from the current trend as per technical

Most common term used by traders/analyst is

Tighten your Stop Loss/Use Trailing Stop Loss

Stop loss order is an order to close position if/when losses reaches a particular point. In other words  stop loss trade  is an order by which you can decide the maximum loss that you are ready to accept. Here we are going to discuss only Stop Loss Order regarding Day Trading, but the same principle can be used for Swing Trading or Long Term Trading.

 

 

 

How should one implement  to ‘Use Trailing Stop Loss ‘ ?

The  is to reduce the risk and/or lock-in profits. As we hold a position over time and the paper profits begin to build, we periodically adjust the Stops to lock a larger percentage of our gains as time passes by. By tightening the Stops, we reduce the risk of incurring losses – reduce the risk of allowing profits to slip away.

 

 

 

Implementation of stop loss stocks

If you have a Buy (long) position

1. Identify the nearest support level. This can be a Pivot Low, or a consolidation. Put your stop just below the support.
2. Calculate the 5 period Exponential moving average. Your stop should be moved just below the average.
3. Locate a Fibonacci retracement of the nearest up swing. Keep a stop at 50% retracement of this up move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.

4. Keep an eye on volumes if it is not huge on correction you can hold the stock.

 

 

 

If you have a Sell (short) position

1. Identify the nearest resistance level. This can be a Pivot High, or a consolidation. Put your stop just above the resistance.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just above the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest down swing. Keep a stop at 50% retracement of this dowbn move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.

4. Keep an eye on volumes on upside.

Discipline

Once a stop is installed, it cannot be moved lower for a buy and higher for a sell. Stops for buy positions can only be moved higher, while stops for short positions can only be moved lower.

9 thoughts on “How to use Stop Loss order in Trading

  1. Bramesh Post author

    Dear Sir,

    Stop loss is price where you want to cut down your position

    Trigger price is price slightly above SL so as to trigger is set before your Sl comes.

    Market order is order placed at the current bid and offer rate.

    Rgds,
    Bramesh

  2. Anu

    Hi.
    Can you also please explain stop loss, market price and trigger price. In some brokerages putting a stoploss is too complicated.
    Thanks.

  3. Bramesh Post author

    Hi Sanjib,

    Profit Booking helps us a lot in standing with our positions with capital in hand to take further trades.

    Rgds

  4. Bramesh Post author

    Thanks Sir,

    Your comments keep me charged. Thanks again

    Rgds

  5. Bramesh Post author

    Hi,

    I will try to update the same with some example in near future.

    Rgds,
    Bramesh

  6. MANISHA

    DEAR SIR

    I HAD READ YOUR ARTICLE ON THE STOP LOSS.
    BUT I HAD UNDERSTOOD THE SECOND POINT OF CALCULATION OF 5 OR 8 DAY EMA TO TRAIL THE STOP LOSS AND FIBBONACHI RETRACEMANT
    CAN SIR EXPLAIN IT WITH THE EXAMPLE ON THE CHART.
    I WILL ME HIGHLY OBLIGED.

    MANISHA

  7. Sanjib

    “Trailing stop loss” I just use this theory on today’s volatile movement & its realy works good to lock your profits

  8. gauresh

    Ganeshji, either in home or office,
    would work wonders and eliminate all kinds of obstacles to success in life.

    Vakratunda mahaakaaya suryakotee sama prabha, nirvighnam kuru mey deva sarva kaaryeshu sarvadaa.

    Aapka sukh Ganesh ji ke peth jitna bada ho, aapki life Ganeshji ke sund jitni badi ho, aapke bol modak jaise mithe ho.

    Jor Se Bolo
    Ganpati Bappa Moriyaa!!!

    Happy Ganesh Chaturthi.

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