Role of Stop Loss Tool in Stock Trading

01 Jan

‘Stop Loss’ order is a very important tool for online trading in stock market. It is just like an Insurance to protect you from a great loss in extraordinary circumstances of extreme fluctuation in price of your traded scrip at any time during your market hours. Particularly for a Day Trading, SL is must. Day trading is always risky just as a pearl diver’s diving in the ocean. This tool of the system is like a cylinder of oxygen to provide you the shield against sudden disaster of abnormal collapse or rise in price of your scrip.

You will be surprised to know that after you have placed your SL order, you should never think that you are cent per cent safe. Even after a SL order, you may suffer an unbearable huge loss. Sometimes, the bid or offer price strikes your trigger price and converts it in an open order as per the system, but if there is no any buyer or seller (whatever the case may be) in-between the gap of your both prices, you will lose your priority and you will wonder why your order is not executed.

Thus, your SL order is not a guarantee to protect you from possible greater losses all the times. In the circumstances when your SL order converts into normal order after hitting your trigger price, your presence must be there to quote the market price to square off your trade immediately or you should have authorized your Broker/Operator to do so on your behalf. In case of your absence at the moment, you may adopt some safer precaution to maintain a reasonable gap between your sale/purchase prices and trigger price. The size of this gap depends on many factors such as volatility, price movement and difference between best buy and sale prices. It is better not to undergo any trade in case of you are out of touch from the market for any of your reasons.

SL order indicates its negative meaning of ill omen just after your initial order of sale or purchase is executed and you have just started dreaming to reap some profits. But, if the same tool of SL is used to lock in profit, it becomes a positive tool for you. When you are in a winning trade, you should not book profits too early. At this juncture, you should prepare yourself to sacrifice some profit to have chance of still some more profit. By using this technique, you should modify your SL frequently as long as it is possible in line with the market price of your scrip moves towards your more and more profitability. In other words to say, you can secure your some profit initially and thereafter by putting trailing stops progressively towards long (upward) or short (downward) position as the case may be, you can increase your profits still more.

– Valibhai Musa

1 Comment

Posted by on January 1, 2009 in Article, MB


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One response to “Role of Stop Loss Tool in Stock Trading

  1. gustongroves

    January 3, 2009 at 8:30 am

    The way you presented and compared the data is real good. I agree with you, Stop Loss is such a great tool in the day trading. We all know day trading is always a risky job to perform.



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