Stop loss in trading holds critical weight. No trader can enjoy success without following stop loss in trading.
Every trader needs a stop loss plan, like the human body needs the water.
In trading, Holy Grail methods don't exist. When your trade goes wrong, your stop loss order protects trading capital.
But many traders don't follow stop loss in their trades. And they end up losing all the capital.
The reasons are many. One problem traders face that.
They don't know the point (level) too put stop-loss or how much stop loss they should keep.
Three reasons why it's important to use stop loss in trading.
If you don't know where to put stop-loss, then today's post stands for you. I will share a few methods of knowing the stop loss point (level).
Use Support & Resistance Levels as a Stop loss
The simple points to keep stop loss in trading, but traders don't count it.
Here are some factors to keep in the notice.
First, keep a few points cushion from support & resistance level to avoid sudden spikes.
Second, use strong methods to find support and resist points. The market has evolved a lot. The same you have to do now by using more robust methods in your trading.
Use Percentage-based Stop loss
The best method to decide the stop loss point let me explain how it works.
For example, you have 1 00,000 trading capital. And you want to risk only 2% on each trade. How much are your risk then?
Simple math’s 2% of 1, 00,000 INR = 2000 INR stop loss on each trade.
This method also helps in deciding the position size. Your position size will increase or decrease with the ticker price of a stock.
Use the Last Swing Point as a Stop loss
Many traders follow the last or near swing point stop loss strategy.
But many times, the market breaks the last or nearest swing point and turns back. In such a state, your trade hits the stop loss.
Here's how to avoid such points. Follow the stop loss price on a closing basis or keep a few points buffer from a swing point level.
A closing price carries more weight than a high low price. Because the close price gives a more reliable indication of the market's state.
Use your Trading Method for Stop loss
Here in this method, you will use your trading signal technique as the stop loss.
Suppose you use RSI or Trend lines, or any other method to find the trades.
Now let's say you bought 'RELIANCE' shares.
And your trading method gives you the sell warning. So you will use such a sign as your stop loss.
But make sure your strategy follows market structure fast gives accurate trade signals.
So you've learned now the value of stop loss in trading. Stop loss protects your trading cash when you go wrong.
Your stop will help you get a better risk-reward and also could manage a winning or losing trade.
Support & resistance levels work as stop loss, but always keep a few points buffer. And use strong ways to find such levels.
Fix percentage based Stop loss rule works best because it helps in position sizing too. So try it.
You can also use the last or near swing level as stop loss, but keep a few points' buffers or use on a close basis.
You can use the stop-loss trading method. But if you have a reliable trading strategy that gives reliable trading signals.
Backtest all stop loss rules. And follow what works best for you.