How to Determine where to Set a Stop Loss?

  • Posted By : reliancesmartmoney.com
  • Wednesday Sep 13, 2017

Key Takeaways

  • Ideally, bet only 2% of your capital on one stock
  • Stop-Loss evaluation depends a great deal on time and fluctuation
  • In contrast to traditional belief, this mechanism involves timing the market (making predication based on a wide-ranging analysis) and safeguarding capital
  • Long position means when trader buys a stock in the hope to sell it at a higher price during the same trading cycle (which may be a day in Cash Market or a month in Derivative Market). Short position is exactly the opposite

Losses are in common to trades and are mostly impulsive but not unavoidable. Your apprehension to get into the market is justified; nonetheless, think about the potential profits this very volatility can reward you with. Even the most evolved trader’s predictions (better yet, analysis) can flaw since that is how the stock exchange is. Stop-loss is a common term but to execute it in a right way is important and that is exactly what we discuss here.

Market Overview

Stock market is greatly hot-blooded and can rapidly reverse without any notice. This can be due to a variety of reasons, two most significant being:

  • Fundamental-level changes within a company
  • Emotional rush creeping through the market (at a technical-level)

To explain these points, let us take two most recent reports.

From the below table, it is distinctly observed how Idea sprang-up gaining significantly in mere five working days owing to talks of its merger with Vodafone.

Date Open High Low LTP (Last Traded Price) Close Volume Turnover (in Lakhs)

31-Jan-17

101.2

119

97.8

110.15

110.1

28,30,53,046

3,11,873.15

30-Jan-17

79.8

100.8

79.5

98

97.7

15,48,63,527

1,46,299.47

27-Jan-17

76

78.25

75.65

78.1

78

79,72,331

6,150.57

25-Jan-17

75.45 73.75

76.9

76.3

76.15

2,49,04,002

18,809.79

Source: https://nseindia.com/

Alternatively, Infosys fell rapidly by 2.10% on 31 Jan 2017 when an emotional wave hit the IT sector due to the H1B bill passed by the US President on that day.

Date Volume Open High Low LTP (Last Traded Price) Close Turnover (in Lakhs)

31-Jan-17

904.4

929.4

941.5

942

928.6

1,20,34,267

1,11,325.73

Source: https://nseindia.com/

Understanding market is linked with precise determination of stop-loss since if you can read the signs, you somehow tip-off on the future to protect your capital.

Points to keep in mind when setting up a Stop-Loss

Have a Plan

First you need to have a plan. Traders who delve into the stock market without any methodical study are more likely to get caught in its volatility and bear significant losses. Post defining a strategy, it is important you set an expected accuracy rate and determine your risk-bearing attitude per trade basis. 

Clever Capital Allocation

You should avoid risking majority capital on any one trade.

Market Analysis through Graphs

List out securities and analyze stock performance based on market movements in the past by using defining tools like oscillators and histograms.

Examining monthly and yearly graphs is important for long term investment ambitions, while for successful trading, it is imperative that you analyse the daily volatility of a particular financial instrument carefully.

Support/Resistance

The easiest method is by defining the resistance and support levels of the stock. It is determined by calculating the highest point to which the stock has risen (Resistance Level) and the lowest point to which the stock has fallen (Support Level) within a duration (weekly, monthly, quarterly, etc).

Moving Averages

Moving Averages are used to calculate support and resistance levels more accurately. This average keeps moving with the current date. Set your stop-loss at 1-2% of the average value.

Time-Based Stop Loss

This is based on how long a trader is willing to hold a trade. In this feature, if a particular stock is not performing as expected, you can exit and get into another profitable trade.

Trailing Stops

These lock-in profits. Execute ‘Stop-Up’ to book profit and/or a ‘Stop-Down’ to prevent loss. Here, the price moves in the direction of trade.

Recent Ruling Factor

In a more advanced trade setting, Option Trading is gaining significant exposure owing to its flexibility in trading a stock at an exact rate with certain timeline boundaries (and limitations nonetheless).

While keeping these points in mind will assist you in determining where to set the stop-loss, it is important to note that no two trades are alike and diverse factors govern different trades. Continuously evaluate and analyse the trade for a good trading judgement.

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