What is a stop loss, and how does it work?
Stop loss is a measuring tool that informs how much you stand to lose on a particular trade. It is a crucial step to calculate stop loss in advance, so if the direction of the trade changes, you can make a better decision; in case the price of the stock goes in a reverse direction from the expected one, stop loss helps to minimize the loss, and can prevent losing your profit.
Stop loss plays a vital role for those involved in intraday trading. The trader here defines the level for stop loss, so once the cost reaches that level, the transaction automatically closes there, preventing further monetary loss. By doing so, the trader can save money and plan to recover the loss.
How to calculate stop loss for options?
We will understand how to calculate stop loss for options with an example to understand better how to calculate accurately; you may refer to various videos available online for the same, but we believe the calculation below will help you understand how to calculate stop loss for options.
Suppose there is stock currently trading at Rs. 104, and you want to buy it. But first, you must confirm at what price you want to keep the stop loss. As the name suggests, stop loss; you stop making a loss after that amount. In the above scenario, you may consider keeping the stop loss at Rs. 98. This figure indicates that Rs. 6 is bearable as loss in this trade. Still, if it goes beyond that, then it is not acceptable, so when the cost reaches Rs. 98, it will stop there automatically from any further movements. It will state transaction terminated.
Furthermore, your target amount should be 1.5X of the bearable loss in the stop loss.
So, here the stop loss is 6, then your expected gain must be 9 (6 *1.5), so you can expect to earn 104+9=113.
The above example was with a very small figure, let say you have a large amount invested and want to stop loss, at that time you can search for stop loss calculator online tools available for stop loss calculating, if you simply google “stop loss calculator India”, you will find various sites providing stop loss calculator India options for free, as a beginner, you may take help of such tools. After a while, you will know how the calculations are done without any tool. You will face a little struggle in the beginning. But if you do not want to rely on the online calculator, or are curious to know how the calculator works, we will show you it works backstage.
There are various methods to calculate your stop loss for every trade, and it is upon you which method is convenient for you to calculate stop loss.
Moving Average Method
Calculating the Stop loss by Percentage method
This is a very common method and also widely used. The users are majorly intraday traders. The user needs to assign the percentage loss he can bear as loss.
Example: Let us assume you have a stock of Rs. 50 with you, and you can only bear 10% of loss on it, more than that is not affordable, so your stop loss would be at set at 45
10% of 50 = 5 (50-5 = 45).
Calculating Stop Loss by Support Method
If we compare this method with the Percentage method, this can be quite tricky and a little tough to understand and implement. To implement this method, you need to know the most recent support level of the stock.
An area of support is where the stock price often falls, and a place of resistance is where the stock price rises. Once you determine the levels, you need to put your stop loss below the support area.
Example: If you have a stock currently trading at Rs. 500 per share, and it often falls at Rs. 440, then this is your support level; you must set your stop loss below Rs. 440.
Calculating Stop Loss using the Moving Average Method
This is yet another method used by intraday traders; in this method, you need to see the stock chart. The longer-term moving average would be the best as it keeps you into the trade and prevents you from removing too soon from the trade.
Once the moving average is defined, you can put your stop loss somewhere below the average level. It will give enough room if it keeps changing the direction.
Stop loss hunting software download
Hunting the stop loss is a dirty activity in this market; some brokers follow this practice to kick the competitor out from the trade by knowing his stop loss.
This kind of practice can be avoided by hiding your stop loss.
With the help of stop loss hunting software downloaded for free, you will be able to keep your stop loss hidden from your competitor and eventually earn profit.
Using the stop loss calculator India is good when you know clearly what is the stop loss term and strategy. By setting stop loss value at some percentage, investors can reduce their losses and go for more profits. This strategy is useful when the new investors want to minimize their losses and earn good profits.