Stop loss order is the golden rule of stock trading in order to protect your trading capital. Moreover, preserving the trading capital is the utmost duty for a trader. If a trader has capital, he can trade in near future. By losing more than 5% of capital in a single trade, a trader will bring devastating result for his trading career. So, there is no alternative to achieve stock market basic knowledge.
Why does stop loss order matter?
In order to survive in trading career, traders have no alternative except taking care of trading capital. Gambling is the opposite of trading. Gamblers have fifty -fifty chance to win or loss. But trader has full control over his loss.
If a trade goes against you, you should correct trading mistakes as early as possible. Alternatively, protecting trading capital is similar to making profit. Traders should stick to this rule in every situation.
What will happen if you don’t follow stop loss order?
You may lose your whole capital unless you follow this rule. Trading is a game. If a trader wants to win the race, he should control over emotion and greed. Suppose you have bought a share at $50. Later, your share starts to downtrend, but you didn’t follow the stop loss order.
Now share price is at $30. You have already loss your 40% capital. Hence, your remaining capital is 60%. If you make the same mistake in next trade, you may kill your whole capital. In this way, you are on the verge of market out.
Why do traders reluctant to follow stop loss rule?
Traders reluctant to follow stop loss order because of greed and emotion. So, they want to wait for some more time to see the opposite reverse. In this case, they may right . In many cases, they have to lose money for this mistake.
Moreover, traders may not aware of dividend declaration effect and record date effect. On the other hand, traders may take wrong decision if they don’t know the top 5 price sensitive dates.
How to apply stop loss order?
You should observe the buying and selling signal. Then, take your decision . Suppose, your buying price of share is $40. Your first stop loss is $1. And your stop Loss is $2. So, your selling price is at $38/39. Stop loss percentage in two cases are 2.5% and 5%.
How much loss is enough to tolerate?
Although risk tolerance varies from person to person, you should habituate to take risk if you want to become a good trader. As a result, you may tolerate 2.5% loss or 5% loss. Even your loss tolerance may 10%. But, your loss in a single trade should not exceed 5%.
What are the reasons for downtrend?
The reasons of downtrend market are economic factors, overvalued market and money out flow. On the contrary, gamblers interaction and excessive sell pressure are also responsible for downtrend. Sometimes stock price manipulation tactics are responsible for downtrend market.
What are the downtrend trading strategies?
Downtrend trading strategies depend on level of your experience. Literally, a newbie trader should get out of downtrend market and wait for further movement.
On the other hand, experienced traders can short sell. As market behavior is unpredictable in downtrend market, traders with little experienced can apply stop loss rule.
Conclusion
Stop loss order rule is easy to hear but difficult to apply. Naturally, human being has greed and emotion. Emotion prevents a trader to sell at loss. Excessive greed is dangerous in trading career. Whenever you face downtrend, never hesitate to apply this stop loss order rule.
Founder of The Financial Ask
