How to handle stop loss while trading in stock markets?

Asked 14-Nov-2017
Updated 18-Apr-2023
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Stop loss is a technique used by traders in the stock market to minimize losses when prices fall beyond a certain point. It is an essential risk management tool that can help traders preserve capital and avoid significant losses. In this article, we will discuss how to handle stop loss while trading in stock markets.How to handle stop loss while trading in stock markets

  1. Set a stop loss order: The first step in handling stop loss is to set a stop loss order. This is an order that is placed with a broker to automatically sell a stock when it reaches a certain price level. The stop loss order is designed to protect the trader from further losses if the stock price falls below a certain point.
  2. Determine the stop loss level: The next step is to determine the stop loss level. This is the price level at which the trader is willing to sell the stock to limit the losses. The stop loss level should be set based on the trader's risk tolerance and the volatility of the stock. It is essential to set a stop loss level that is not too close to the current stock price, as this can result in the order being triggered by normal market fluctuations.
  3. Monitor the stock price: Once the stop loss order is in place, it is important to monitor the stock price to ensure that the stop loss level is not breached. If the stock price falls below the stop loss level, the stop loss order will be triggered, and the stock will be sold automatically. It is important to note that stop loss orders do not guarantee that the trader will sell at the exact stop loss price, as the actual price may be higher or lower than the stop loss level.
  4. Adjust the stop loss level: Traders should also consider adjusting the stop loss level based on market conditions. For example, if the stock price has risen significantly, the trader may want to adjust the stop loss level to a higher price to lock in profits. Conversely, if the stock price has fallen significantly, the trader may want to adjust the stop loss level to a lower price to limit losses.
  5. Use trailing stop loss: Trailing stop loss is another technique that traders can use to handle stop loss. A trailing stop loss order is similar to a regular stop loss order, but the stop loss level is adjusted based on the stock's price movement. For example, if the trader sets a trailing stop loss at 5%, the stop loss level will be adjusted upward by 5% as the stock price rises. If the stock price falls, the stop loss level will remain at the same level, allowing the trader to limit losses.