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Day 66: Basic Stock Market Concept
What is a Stop-Loss
in Trading?
A stop-loss in trading is an order
placed with a broker to automatically sell (or buy back) a security when it
reaches a certain price, in order to limit potential losses.
As an example, Jojo buys a stock at ₹100. He
decides he doesn't want to lose more than ₹ 10 per share, so he sets a
stop-loss at ₹90.If the price drops to ₹90(or below, depending on market
conditions), the order triggers and the shares are sold.
A stop- loss helps you manage risk by
pre-defining the maximum acceptable loss on a trade.
Why is stop-loss
important for Beginners?
A stop-loss is an order you place to automatically
exit a trade if the price falls to a predetermined level. It helps beginners by
limiting potential losses, controlling emotion from the decision to exit, and
giving them discipline.
Key takeaway: It protects your capital and stops a small mistake
becoming a big loss.
How to Set a Stop-Loss?
To set a stop-loss, we should follow these steps:
First we decide our risk tolerance (e.g.,
we are willing to lose 3% of the trade).e
Then we should identify a price level based
on our technical analysis (e.g., the recent support level).
Then we should place the stop order with the broker
at that trigger price. For example: Buy at ₹100 and set stop at ₹90, if
our risk is ₹10 on one trade.
Key takeaway: Set the stop
before you enter the trade, and base it on both risk and the market structure.
What is a Better Stop-Loss
Percentage?
There’s no “one size fits all” percentage, but a
commonly used range for beginners is 𝟯 𝘁𝗼 𝟱% below the entry
price for longer trades, or tighter (𝟭- 𝟯%) for very short-term trades. One guide suggests starting with a percentage range and adjusting for volatility.
Key takeaway: Choose a
percentage that matches the stock’s volatility, your risk comfort, and your
trading style — don’t pick an random number.
Can Stop-Losses
Guarantee no Losses?
Stop-losses cannot guarantee no losses.
They can limit losses, but in fast-moving markets or gaps
(when price opens much lower), the execution may occur at a worse price than
your stop trigger.
Key takeaway: Use
stop-losses as a safety tool, but also maintain position sizing, risk
management, and readiness for unexpected market moves.
Should I use a Stop-Loss
for Long-Term Investing?
Using a stop-loss for long-term investing is
less common and may not always be suitable. Long-term investing often banks on
fundamental growth over years, so normal short-term price fluctuations
shouldn’t trigger exits. But in some cases (e.g., you buy a stock expecting
growth and the business model collapses) a wider stop-loss could act as a
safety net.
Key takeaway: For long-term
holds, consider very wide stop-loss levels or other risk tools
instead, so you don’t get knocked out by normal market noise.
What Happens if the
Market Gaps Below my Stop-Loss?
If the market opens (or moves) sharply below your
stop-loss price (a “gap down”), your stop-loss is triggered but the execution
may happen at a much worse price than your stop level. This is called slippage.
Key takeaway: Stop-loss
isn’t a perfect guarantee of exit at your exact price—gaps and fast moves can
worsen outcomes, so factor in this risk.
Can I Change my
Stop-Loss after Placing It?
Yes, you generally can modify or
cancel a stop-loss order before it gets triggered (subject to your broker’s
rules). Many traders adjust the stop-loss as the trade moves in their favour
(tightening it) or if circumstances change.
Key takeaway: Changing your
stop-loss is allowed—but beware of letting emotions drive loose or vague
changes. Any adjustment should still align with your risk plan.
Is Stop-Loss
Suitable for all Types of Stocks?
Not always. Stop-losses work best for stocks with
regular liquidity and moderate volatility. For very illiquid stocks, or ones
prone to wide overnight gaps, a tight stop may trigger undesirably. Also, for
very long-term holdings (where you expect major growth), frequent stop-loss use
may hinder holding through normal dips.
Key takeaway: Evaluate each
stock’s liquidity, volatility and your holding time-horizon before deciding
whether and how to use a stop-loss.
How does a
Stop-Loss differ from a Trailing Stop-Loss?
A stop-loss is a fixed order: you
set a price at which you’ll exit if the stock falls. It remains unchanged
unless you manually adjust it.
A trailing stop- loss move
automatically in your favour: if the stock rises, the stop level moves up a
defined amount or percentage behind the highest value reached. If the price
then falls the set amount from that peak, the stop triggers.
Key takeaway: Use a stop-loss to limit losses; use a trailing stop
to both protect gains and limit losses, especially in trending
favourable positions.
if you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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