In the Technical Analysis of the Stock Market, Stop Loss plays a very vital role. Very briefly it is a level below which (for long positions) or above which (for short positions), the technical trader is willing to cut or stop his losses.
As you are aware long position means the trader has bought the share in anticipation of increase in the market price and similarly short position means the trader has sold the shares in anticipation of decrease in the market price.
Of course, each technical trader fixes the stop loss based on different factors. Most of them base it on support (for long position) and resistance (for short position). A few of them also base it on moving averages and some on indicators such as MACD, Average Directional Index, and Parabolic SAR. Hopefully, we will discuss all these in this website.
I admire the concept of Stop Loss for the following reasons:
- Stop Loss is an excellent tool to maximise your profits and minimise your loss.
- Stock Loss is like an insurance premium; set the stop loss and you can have better peace. In the absence of stop loss, you may incur huge loss. You need to remember Stop loss= insurance premium for greater rewards.
- Stop Loss gives you discipline instead of groping in the dark. Once you fix the stop loss, your system will take care of the rest. The other alternative is hope and prayer!!
- You will know the maximum loss you will incur. There will not be sudden surprises for you.
- In the Reward-Risk calculation, stop loss plays an important role.
- Stop Loss also has a role even in booking profits. In other words, it is not only for limiting your losses but also can help you ensuring your profits. When you fix progressive stop losses, you can also optimise your profits.
Of course, you need to understand that the concept of ‘Stop Loss’, is not free from flaw. There may be occasions, the stop loss may be triggered but the price may resume in the direction as originally visualised by you. If you are a good trader, you will have to take it with a smile! Of course, you will improve with each such experience. My suggestion is to keep a journal and write down your success stories and failures. When you keep evolving yourself in applying stop loss, you will reach a stage, where a single trade could result in sizeable profit to take care of such incorrect moves. Keep smiling and keep trading using the concept of ‘Stop Loss’.
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