Is Getting Stopped Out OK?

Behzad Elavia | Sharekhan Education

In the trading world, every trader’s goal is to make a consistent profit over a period of time. The word “consistency” is duly achieved with patience, discipline, tested algorithms/structures, exiting timely from a trade set-up (or investments), etc. It is frequently observed that profits are often booked quickly, but when the stock plays against us, unnecessary hopes and emotions force a trader to stay in the trade for longer deficits. This is a hallmark sign of a novice trader. In this article, we are going to discuss the necessary precautions to be taken while planning a trade or investment to safeguard the capital and formulate the right mindset for a successful trader.

What is a Stop Loss?

A stop loss measures a level to protect the price from going beyond a particular level. It acts as a protective area to decide the risk side of the trade, beyond which a trader should not incur any further loss. Usually, we draw a stop loss level by taking into consideration an area where a stock is expected to reverse. We typically draw that area with proximal and distal lines, helping us decide on the stops. Hence, the stop loss helps exit gains with a pre-defined loss (also known as the Protective Stop Loss) in case of an unfavorable move. Hence, in the event of an unfavorable move, the stop loss helps to exit the gain with a pre-defined loss (also known as the Protective Stop Loss).

Stop Loss with Position Sizing

In our core strategy class, we explain the concept of the 2% rule. This helps us decide on the calculation of risk per trade for every intra-day or swing set-up. A trader should not fix his risk beyond 2% of the capital allocated. The basic idea behind the fixed percentage is to halt a trader from trading in euphoric situations and protect the capital in adverse situations. When we remove the emotions from the picture, it becomes easy for us to trade as per the defined rules freely.

How to place the stops?

A day/swing/positional trader ideally judges the length of the trade by viewing the DATR of a stock. A trader can can calculate stops by applying 2%, 5%, or 10% of DATR. However, he can choose to place it manually below or above an area of interest (Support, Resistance, Demand, Supply, Pivots)

In the case of an investor, you can place the stop loss (SL) at 10% of the average true range (ATR) of weekly and monthly charts only. Again, you can place this SL above or below an area of interest (Support, Resistance, Demand, Supply, Pivots).

Conclusion

Any professional trader/investor first looks to protect the capital by managing risk appetite, detaching from associated emotions. This would help him to compound and churn his capital with better accuracy and strike rates for the trade.

This was about Stop-Loss. For a better understanding and learning of other trading concepts you need to enroll in our courses. Visit our website or attend a Free Workshop to know more about our courses.

By enrolling in this stock market course, a learner can learn the various aspects of trading in Futures and Options.

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Is Getting Stopped Out OK?

Published by Sharekhan Education | July 12, 2022

Is Getting Stopped Out OK?

What is a Stop Loss?

Stop Loss with Position Sizing

How to place the stops?

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