Hello readers, we are happy to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A for Stock Market Newbies”, to spread the basic stock market knowledge to the beginners.
This is your go-to resource for demystifying the stock market from the scratch. Each day, we will present 10 carefully curated questions with answers that will cover essential concepts, strategies, and terminologies. Whether you have just entered into the market, or trying to starting your stock market journey, or looking to strengthen your foundation, our weekly post will guide you through the basics and beyond, making investing accessible and understandable for everyone. Happy reading.
Day 68: Basic Stock Market Concept
What is the “2 % Rule” in Risk-Management Trading?
The 2 %
rule suggests you should risk no more than 2 % of your total trading capital on
a single trade. For instance, if you have ₹1,00,000 capital, you risk ₹2,000
max on one trade. This limit helps protect your overall portfolio from a single
big loss.
Tip: Combine this with stop-loss
placement so your loss aligns with the 2% cap.
How Does Position Sizing Help with Stop-Loss
Strategy?
Position
sizing means choosing how many shares/contracts based on how much you’re
willing to lose (stop-loss level) and your risk-limit. If stop-loss is ₹5 and
you only want to lose ₹500, you buy 100 shares. This aligns size, risk, and
stop-loss.
Tip: Always calculate trade
size before placing the trade and stop.
What Is Volatility-Based Stop Placement?
Instead
of a flat percentage, you set your stop-loss based on how much the stock moves
(its volatility). For example use the stock’s ATR (Average True Range) and
place stop at e.g., ATR×2 below entry. This gives the trade more room in
volatile stocks.
Tip: More volatile stocks →
wider stop; low volatility → tighter stop.
When Should You Adjust Your Stop-Loss Before a Big
News Event?
Before
earnings, regulatory announcements, or macro events, price swings and gaps are
likely. Many traders either widen their stop-loss or reduce size to lower
risk—because the usual stop may trigger from noise.
Tip: Mark upcoming events and
adjust risk ahead, not reactively.
What Mistakes Do Traders Often Make With Stop-Loss
Orders?
Common
errors include: setting stops too tight (and exiting prematurely), moving the
stop further away after trade goes wrong (raises risk), ignoring gap
risk/slippage (stop executes worse than level) and failing to align stop with
market structure.
Tip: Place your stop based on
structure, not just %; avoid emotional shifts.
Fixed Stop-Loss vs Trailing Stop-Loss: What’s the
Difference?
Fixed
stop-loss: A
static price point where you exit if loss threshold is hit.
Trailing
stop-loss: Moves
in your favour: as price rises, stop moves up a set amount/percentage; if price
reverses by that amount, you exit.
Trailing helps lock in gains while still limiting downside.
Tip: Use fixed
when starting out; trailing when trade moves favorably.
Can Stop-Losses Fully Protect Against Gaps and
Overnight Risk
No—stop-losses
trigger when price reaches the level, but in gap-down or low-liquidity
situations execution may be at a much worse price (slippage). They help limit
risk but do not guarantee exiting at exact stop.
Tip: For trades held overnight
or in less liquid stocks, consider wider stop or smaller size.
How Often Should You Review or Modify Your
Stop-Loss?
You
should review when your trade’s premise changes: e.g., major support broken,
volatility shifts, your thesis no longer holds. But you should not move the
stop further away just to avoid a loss—that defeats the purpose.
Tip: Review stops only
when strategy or market structure changes—not on emotion.
How Does Stop-Loss Fit Into a Holistic
Risk-Management System?
Stop-loss
is just one component. A complete risk system includes: position sizing,
risk-to-reward planning, diversification, limit on number of active trades, and
exit rules. Without the rest, a stop-loss alone isn’t enough.
Tip: Build your strategy
around risk first, then opportunity.
Is a Stop-Loss Always
Appropriate? When Might you Choose Not Use It?
While
very useful, a stop-loss may not suit every strategy. For long-term
buy-and-hold where you expect volatility, frequent stop triggers hurt. Illiquid
stocks or positions you intend to hold through noise may require a different
risk method. The key: match risk tools to your horizon and style.
Tip: Decide before the
trade if you’ll use a stop-loss or a different risk-control tool—and commit to
it.
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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