Stop Loss Order for Day Trading

What is Stop Loss Order?

Stop loss order is an order to close position if/when losses reaches a particular point. In other words this is an order by which you can decide the maximum loss that you are ready to accept. Here we are going to discuss only Stop Loss Order regarding Day Trading, but the same principle can be used for Swing Trading or Long Term Trading.

Following Example can explain the point.

If u have placed a buy order at 100. You need not place a stop loss order till your trade gets executed. Once your trade gets executed, you have to place another order for Stop Loss.

Now lets assume that CMP(Current Market Price) is 100.50.

Stop Loss Order should be like this

Type= Sell

Quantity = Quantity you have got (received).

Price=99.40

Trigger price =99.50

Note: Trigger price is the price at which your order gets triggered (fired). Till then it’s on hold.

So in our example If CMP falls from 100.50 to 99.55 nothing will happen but at 99.50 your order (Stop Loss) for sell will get executed at a price of 99.40 so your loss would be limited to 0.60 (100-99.40) only.

Additional Points:

Percentage Of Stop Loss

For day trading stop loss of 1-2% max is recommended. Some traders like me use 0.5% stops, which is what I have explained (100-0.5%*100=99.5). You have to decide the % according to your experience & confidence.

If you don’t use stop loss order the price can go down by 5% or even 20% & you won’t be able to do much then, hence for every trade without fail you should use stop loss order.

A warning, don’t ever think that just because you have placed stop loss order, you are 100 % safe. That’s not the case even after a stop loss order you can suffer huge loss. Surprised? See how.

In the above example if the your stop loss order gets triggered at 99.50 for 99.40 but there is no buyer at 99.40 so the order will get triggered but not executed till there is some one ready to buy at 99.40. In mean while some one else has put a sell order at 99.30, now you are at number two still waiting, then if some one puts a sell order at 99.10 you are at number three & hence your order may left behind while others keep putting orders at less than your order & you may wonder why my stop loss order did not get execute!!!!!!!!!!!

Solution for above problem is as follows.

The gap between trigger price & price is important. If you want your stop loss order to be more secured, increase the gap.( Gap between Trigger Price & Price). i.e. triggered price at 99.50 & price 99.10(instead of 99.40). You should change the gap depending upon the share you trade. More volatile stocks require big Gap while for slow movers small Gap is enough. You can decide the Gap on the basis of difference between best buy & best sell (bid /ask) in second window.

Stop Loss For Shorting

For shorting that is selling first & then buying, the stop loss order has to be reversed as follows.

If you have shorted at 100(CMP=99.50)

Stop Loss order should look like this

Type =Buy

Quantity = Quantity you have shorted

Price=100.60

Trigger Price =100.50

Cancel/Modify Stop Loss Order

The most important thing if your stop loss does not get hit & you earn profit by squaring of your position; do not forget to cancel the stop loss order. Yes I repeat do not forget to cancel the stop loss order. Other better option is that you can modify your stop loss order as Trailing Stop till the execution. (I do this as I forget to cancel the stop loss order.)

Following example can explain how you can do this.

Your Stop Loss for first example was 99.50 for 99.40, right? Now if the CMP has gone up from 100.50 to 102.20, you can modify your stop loss order to 101.10 in place of 99.50 & 101.00 for 99.40. If price keeps going up, keep following the price by modification.

Always remember the following rule.

For buy's Stop Loss Order (Type=Sell) “Trigger Price” should be more than “Price” of Stop Loss Order & for Short Selling's Stop Loss Order (Type=Buy) “Trigger Price” should be less than “Price” of Stop Loss Order.

Important Note:

Some Trading Systems allow Trader to enter Stop Loss Order at the time of Actual Order and some Systems allow Stop Loss Order to get automatically cancelled against squaring off position.

Happy Day Trading

Vishal Deshpande