The prices of shares rise and fall frequently in the share market of India. Generally, many investors sell their shares when the prices shot up while some prefer to wait further, expecting greater profits in the future. But they may suffer financial loss if the prices of their shares drop to an unexpected level due to sudden mishaps in the financial world. So investors need to know how to avoid this loss and achieve satisfactory profit by selling their shares at right time in the market. They can adopt the best trailing stop loss strategy to avert any disastrous financial condition while trading in the share market.
Trailing Stop Loss and Its Function
Trailing stop loss involves the functions of risk management and share trading management, for protecting the profits of investors in the share market. It also helps in protecting the amount of money that an investor may lose while trading. This mechanism of trailing stop loss can be implemented to work automatically with the software tools set for trading by brokers. Traders can also apply it manually for ensuring their profits in the share market.
Trailing stop loss functions as a regular share trading order, which moves up according to the price of a share unit. If the price of share increases, the trailing stop loss also goes up by the same points. On the contrary, the trailing stop loss remains stationary when the price of shares drops down at some time.
The procedure of Applying Trailing Stop Loss
- Use of Moving Average Tool – Moving Average (MA) acts as an indicator that shows when to exit from the trade to stop the loss of a buyer. The trader should set this tool according to the preferred period of trading.
- Use of Average True Range software – If a trader wants to set up trailing stop loss as per the volatility of the stock market, he/she can make use of the Average True Range (ATR) tool. It is an indicator that is added or subtracted from the high or low, to get the exact trailing stop loss as per the wish of the trader regarding how long he/she wants to continue in the trade.
Noteworthy Benefits of Trailing Stop Loss in Share Trading
- Trailing stop loss order will sell the shares of a trader automatically when the price drops below the profitable level.
- Since trailing stop loss increases with the rise of share prices, it does not interfere with the profits achieved by a trader.
- This trailing stop loss order can be customized according to the chosen risk management plan and its percentage can be changed anytime as per the convenience of a trader.
- No extra expense is needed for using trailing stop loss orders in share trading. Thus, traders can be more assured of their profits in the share market.
The use of trailing stop loss with the share trading software has disciplined the share market’s activities in India. It is different from an ordinary stop loss tool, as it can move up with share prices, to provide a huge profit to traders.