The major challenge that comes in front of the day trader is what should be the value of stop loss and how to set stop loss in intraday trading.
Although it is a very subjective thing and one can generalize the value, but there are certain ways that can help you in setting the right value of your stop loss.
1. Use Percentage Method
What loss you can bear in intraday trading? No doubt, intraday trading is generally done in stocks that are highly volatile and there are chances that the market gets reverse leading to your losses.
Every intraday trader enters the market by setting a certain target price depending upon his analysis and the current market trend.
The same goes with the stop loss value.
For this, it is good to check for the volatility of the stock in the last few minutes or hours and choose the value that can prevent you from facing loss.
The percentage varies and ranges from as low as 2% to as high as 10%.
For example, You enter in trade in the stock the current market price of which is ₹250 per share. Now seeing the volatility you fix the target at ₹260 per share, but at the same time to prevent loss you pick the stop loss 2% below the CMP i.e. ₹5 below ₹250 i.e. ₹245.
Now if the trend reverses and drops to ₹240 then you would be able to exit the trade as the price hits the Stop loss value.
2.Use Support and Resistance Level
Now intraday trading gives you to take the long and short positions.
Here using the support and resistance level can help you to set stop loss for intraday trading. Wondering how?
First, let’s consider the case where the trader takes the long position in the bullish market. For this refer to the image below.
When taking a long position in a bullish run, then set the stop loss at the last support level.
As seen in the image above, if you take the position at ₹399 then looking at its last support, the stop loss should be set at or around ₹396.
Similar goes with the case when you go short in the intraday trade. Here instead of Support, one must consider the last resistance to define the stop loss value.
*In the case of short selling, the stop loss value is higher than the entry price.
Here if you take a short position at ₹406 then seeing at the resistance, it is better to put your stop loss at ₹408.
This is how support and resistance level can help you in defining and putting stop loss value thus helping you in minimizing the loss.
As the name suggests, this stop loss trails along with the price. To understand this let’s take an example.
Let’s say you take a long position in a DLF stock at ₹400 and set the stop loss value at ₹398. Now, what if due to volatility the share price reaches ₹398 but then bounces back to ₹405?
Here to prevent yourself from missing an opportunity to earn a profit, you can use trailing stop loss along with stop loss.
This is generally set in percentage, so let’s say you set the trailing stop loss value of 1%.
So with a gain of 1% in the entry price the stop loss value increases by 1%.
In the above example, 1% of ₹400 is ₹4, so when the CMP reaches ₹404 then the stop loss value increased to 401.98 and so on.
With this, you can minimize your losses and at the same time would not get impacted by the volatility.
So, as you have seen setting a stop loss all depends upon your risk appetite and if you want to do it using the right intraday trading strategy then here follow the right rule by looking at the support and resistance level of the stock.
Enter into the trade by defining the right stop loss value and preventing yourself from facing losses even if the trend goes against you.
But before you set stop loss for intraday trading, consider the following points:
A Stop-loss order is not meant for active traders.
It should not be used in the highly volatile market.
So, set your limit now by analyzing your risk appetite.
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