Demystifying StocksMaintaining Stop Loss

Understanding Stop Loss

When the target price is greater than the current price, then the stock is considered as undervalued and the traders buy the stock in the hope that the target price will be reached in the future.

Target Price

Current Price

Current Price

Target Price

When the target price is lesser than the current price, then the stock is considered as over valued and the traders sell the stock in the hope to make a profit before the price lowers down

Understanding Stop Loss

• A stop loss is the point or price beyond which if the current price of the stock goes, then you will reverse your earlier position.

Agreeing for Stop Loss

• A stop loss order instructs your broker to sell when the price hits a certain point or price.

Placing a stop loss point • The purpose of stop loss is

to get out of the stock before it falls any further. It indicates maximum loss you are willing to absorb

Minimizing your risk

Illustration

Suppose you have bought one stock ABC ltd. at Rs 100 for a target of 120

or more. This places the profit potential at 20%

The above trade means you are ready to accept a profit of Rs 20 per

share on your trade but have not assumed the condition in case the

stock goes down

Assign a stop loss of 90 Rs which suggests that you are willing to lose not more than 10 Rs. or 10% on a Rs 100 stock

The purpose of the stop loss is to define the maximum loss you are willing to take for a profit potential of Rs20 on a Rs 100

stock in this case

How to set Stop Loss Targets?

The most important factor that affects stop loss strategy is the question of how much you're willing to lose on a single trade. This is important to determine your stop loss target.

Another stop loss strategy to take into account is how risky you believe the trade to be. Depending on the market conditions, you can give your stock more room for movement.

It is also important to consider how volatile the position is. If your position routinely moves up and down in a range of 15% or more over the course of the day, you can't set tight stop loss strategy.

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