Calculate Stop Loss is one of the conventional methods in setting loss threshold in stock market trading. It provides authority to the broker to sell the stock when the price reaches a certain level. For example, A wants to invest in XYZ stocks which are costing Rs 100. A can decide to assign a stop-loss order at Rs 95 which means Rs 5 loss can be entertained per unit. Hence if prices start falling the broker will sell the stocks to limit their risk threshold. Similarly, if the prices start rising at 150, A can input a stop-loss order at 130 which will help the trader to hold the position as it will help in retaining his gains.
The aim of a stop-loss order is to prevent high losses and achieve an added advantage in a volatile market. Stop-loss orders help the traders in making huge returns. However, to use it wisely it is really important to understand how to calculate Stop-loss order.
There are 3 Methods to Calculate Stop Loss
In the Percentage method, the intraday trader fixes a percentage where the stop loss can be assigned. It is one of the most common methods used by day traders. In this method, the trader loses a fixed amount of loss as the percentage is decided beforehand. This method helps traders to make a decision that is free from any emotion.
For example, A has purchased the stock of XYZ at Rs100. Here the stop loss order will be triggered when the stock will start losing the value at 10%. Hence when the stock will start falling and reach Rs 90 per share. The broker will sell all the purchased stocks to limit the risk.
Moving Average Method
The moving average method is considered an easier method compared to other methods as it’s simple math as in the process the moving average is applied to stock prices and then the stop loss is assigned below the moving average level as it will give some space to move in a different direction. It is considered better to apply moving average in longer-term charts as it will provide an optimal result.
For Instance, A has bought the same stock at Rs100 and the moving average shows Rs96, then the stop loss will be assigned at Rs93. This will help traders keep the stop loss at an optimal stage as it should not be kept very close to the moving average.
Support Method to Calculate Stop Loss
The support method is slightly difficult than the other methods of calculating stop loss. To understand in a better way, it is very important to understand the support level in day trading.
In Intraday trading, the two levels can be seen which are known as support and resistance. Support is the phase when the demand of the stocks starts increasing as the price starts falling and which leads to stability of price for some time. In the support method, the trader puts the stop loss below the support level.
Let’s understand this with an example, assume that the price of the XYZ stock purchased by Mr. A has reached the recent support level at Rs 200 the trader should put the stop order at Rs 190 to safeguard his returns.
Finally, it’s important to remember that stop-loss orders can be calculated better with an understanding of the stock moments as the methods do not guarantee high returns. It is always advisable to analyse the market factors before putting a stop-loss order.