Trading like any other business has inherent risk. A few bad moves and you will likely lose all that you’ve earned, if you do not employ proper risk management techniques. Once you have trading risk management in place, rest assured you will be able to optimize your gains.
Stop loss and Take Profit are the two techniques that traders use to minimize their losses and optimize their gains. Stop loss is used limit the losses in case the market does move as expected. Take Profit is your target profit or your expectations from the market. Once the take profit is hit, you close your trade to take home profit.
Stop loss and take profit helps a trader to keep his emotions in check and trade cautiously based on strategy rather than base their trades on intraday tips
Stop loss is generally set at a point that you are comfortable with. For example, if you buy a stock at Rs.1000, you may have a stop loss at 5% less. This means if the stock goes down by 5%, you’ll sell off.
Stop losses are immensely helpful when you have multiple open trades and you have difficulty in monitoring them.
Trailing stop loss helps protect profits. If the market has moved in your favour, having a trailing stop loss ensures that the trade remains open as long as it has the momentum. Once the stock trails back, your trailing stop loss is triggered and you sell the order.
Stocks have a tendency to remain steady at particular support levels. So, if you place your stop loss immediately behind critical support and resistance levels, you’ll be able to protect your trade.
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