Stop loss is a trading strategy that helps intraday traders limit their losses. There are various ways to set stop loss for intraday trading:
- The percentage method. This is pretty straightforward as you only need to decide on what percentage of the stock price you are prepared to give up before exiting your trade. For example, if you buy a stock at Rs. 100 and you are willing to lose 5%, you can set your stop loss at Rs. 95.
- The support method. This is based on the technical analysis of the support and resistance levels of the stock. Support is the level where the price tends to bounce back from a downward trend, while resistance is the level where the price tends to fall from an upward trend.
- The moving average method. This is based on the use of moving averages, which are indicators that show the average price of a stock over a period of time. Moving averages can act as dynamic support and resistance levels, as they change with the price movement.
Apart from setting your stop loss, you should also have a target price for your intraday trade. This is the level where you want to book your profit and exit your position. A common way to calculate your target price is to use the risk-reward ratio, which is the ratio of your potential profit to your potential loss. For example, if you have a risk-reward ratio of 2:1, it means that for every Rs. 1 you risk, you expect to make Rs. 2 in return.
To calculate your target price using the risk-reward ratio, you can use this formula:
- Target price = Entry price + (Risk-reward ratio x Stop loss amount) for long positions
- Target price = Entry price - (Risk-reward ratio x Stop loss amount) for short positions
For example, if you buy a stock at Rs. 100, set your stop loss at Rs. 95 and have a risk-reward ratio of 2:1, your target price would be:
- Target price = 100 + (2 x 5) = Rs. 110
Similarly, if you sell a stock at Rs. 120, set your stop loss at Rs. 125 and have a risk-reward ratio of 2:1, your target price would be:
- Target price = 120 - (2 x 5) = Rs. 110
Setting your stop loss and target price can help you manage your risk and reward in intraday trading effectively. However, you should also be flexible and adjust your levels according to the market conditions and your trading style