Stop Loss in Stock Market

 Trading in the stock market without using any safety net is just like commuting in traffic without a helmet. Surely it is very risky, and if adverse events occur, it would be a great loss. The fact is that every participant in the stock market shares some basic intention of generating returns. However, there is no assurance or guarantee that you will surely earn profit, and there is also the possibility that you will incur huge losses if the financial market or a particular stock does not move in the direction that you anticipate it would. As a result, you should try to minimize your losses here.

At the time of placing orders or creating a trading position in the stock market, especially in day trading or short-term trading, you need to use certain techniques so that you can limit losses. “Stop Loss (SL) is the kind of safety net you can use to limit your losses. Accordingly, in this article, we are discussing stop loss, what the role, its use, is and how to perfectly set stop loss and seize returns with a precise approach.

What is Stop Loss in Equity Markets?

Stop-loss is a kind of risk instrument that is used to bind the probable losses of traders or investors in the stock market. When you trade with stop loss, it will work automatically whenever the price reaches or triggers at the stoop loss point. It helps to protect investors from further losses, as it acts like a safety net when the market or individual stock price moves beyond your expectations.

In the stock market, people also make decisions highly motivated by their emotions, and sometimes such emotions become the prime reason for financial losses. In such situations, stopping losses helps investors manage their emotions and avoid making decisions that are influenced by their emotions.

You can use stop-loss in both types of trades: long (buy), sell, or short-sell. You just need to choose the right trigger point from where you want to restrict the losses from further increase. Using the stop-loss method, you can avoid huge losses, especially in a highly volatile market.

How Does Stop Loss Work?

When you use the stop loss or trade with SL, it will work like a trigger point to square off your trade position when the stock price reaches this SL trigger point. It works in both types of trade positions.

The stop-loss mechanism simply works like a trigger point where the share price moves in an opposing direction or against your expectations. This means if you have created a long position and the stock price starts falling past your buying point, then stop-loss will stop your losses beyond the SL point.

Similarly, if you have created a short position in the market and the stock price moves in an upward direction, SL will work somewhere at the higher point to limit your losses. However, there are different types of stop loss you can use as per your trading style and trade positions. 

Types of Stop Loss Orders in Share Market

Though there could be multiple types of stop-loss orders, traders or investors use them as per their applicability and feasibility. But in the most prominent ways, there are mostly two types of stop-loss orders that are mostly and successfully used by the traders in the stock market. First is Fixed Stop Loss Orders and second is Trailing Stop-Loss Orders. These two popular types of stop-loss orders are massively used by traders across the world on all kinds of stock markets.

Fixed Stop Loss Order

As the name suggests, a fixed stop loss order is a type of order where the stop loss price is set at a fixed point, which is below the market price when you have crates in a long position and above the market price when you create short positions. The stop loss is set at fixed levels once it is set by the trader while placing the order and is not changed automatically, even in highly volatile market conditions. When the market index or the stock price reaches this SL level, it executes.

Trailing Stop-Loss Order

It is different from fixed SL, as instead of a fixed point, a certain percentage is used to set the stop loss in the trailing stop loss order. When you use a trailing stop-loss order, it can automatically adjust the SL as per the change in the price of the stock. This means that when the stock price moves in the same direction as you expected, the SL will also move in the same direction. It can lock in your profits but also limit your potential losses in unfavorable market conditions.