What is Stop Loss? Definition of Stop Loss, Types of Stop Loss, Risk-Reward Ratio

Stop Loss



What is Stop Loss?

Hello friends, today we will talk about Stop loss Theory, which means Stop loss theory. Friends, in this article we will learn what is a stop loss, why it is necessary to put a stop loss, and what are the benefits of applying a stop loss, and some other basic information that you need to know regarding this stop loss.

Friends, before starting this article let me tell you that it is very important for every trader to use this stop loss theory because if you have to trade in the stock market or commodity market or any other market for a long time, this profit. If you want to earn, then you have to use this stop loss theory. There are some traders who have been working in the commodity market or stock market for 2-4 years and they believe that stop loss happens to be a hit. But it is not at all like stop loss is like an insurance policy for you, which saves you from long losses when the time comes.

Friends, there is also its own way or rule of applying this stop loss, where to plant it, and how to plant it. Traders who make good profits in this market say that and many investors also believe that stop loss is a hit in this market, it is only a part of this business that has to happen, and if you lose your loss in a limited range If you want to keep it, then it is very important to apply to stop loss.

What is Stop Loss?

So friends, let's go to the Stop loss Theory. What is the Stop loss Theory? When someone makes an investment, they take a trading position, you take it only with the expectation of making a profit, but sometimes situations are created against your expectation, then at the right time, that position should come out of it as soon as possible. Stop-loss plays a very important role.

For example, the word stop-loss suggests that when your trend starts moving towards a loss, the trade stops in a limited loss and you do not have to face long losses. Ordinarily, most people apply this stop loss after taking a sold-out training position. It is well-known but there are very few people who apply this stop loss or say that the stop-loss follows theory.

When the market suddenly decreases, the intelligence of most people gets corrupted in the decreasing price and even after the price decreases very much, they keep watching that when the market will come up, it will come to our purchased price, then we will exit. That is why they have a big disadvantage, it is the same way that to fill the rainwater in the tank, open its lid and keep it in the open space, but there is a level hole in the tank and the water starts flowing from that hole at one time. So you immediately try to close the hole so that the water stored in the right can be saved, but most people do not do this in the market. 

He sees that the market price is decreasing which is like a hole in the tank. At such times, they sit and watch that the market is shrinking, that is, the tank is emptying, meaning that the profits found in the market are decreasing or the losses are increasing. In this situation, the savvy trader is the one who must put stop loss at the right time so that it is necessary to close the hole in the tank. To save water, it is also necessary to stop the stop loss to avoid long loss.

How to put stop loss?

Friends, now we understand how to apply stop loss? Friends stop loss is applied in two ways. First, we understand that buying first and then selling, like if you bought a commodity, then you buy in it, you put a stop loss below the price. If the price starts rising then you will have a limited loss and you will avoid a long loss. Now we see that selling first and then buying, like if you sold a commodity, then you will have a stop loss above the price you sell. If the price starts rising then you will have a limited loss and you will be saved from a long loss.

What are the types of Stop loss?

Friends, now we see how many types of stop-loss are there? There are three types of friends stop-loss,

  1. Primary stop loss
  2. Break-even stop loss
  3. Trailing stop loss

1. Primary stop loss

First, let us talk about primary stop loss. Primary stop loss is placed immediately after taking the trade, such as if you take a fast position, then according to the technical analysis below whatever the purchase price is, the stop loss is to be placed there. For example, if you buy a commodity at a price of ₹ 1020, its primary stop loss can be ₹ 1000. Similarly, if you take a bearish position, then whatever is the selling price above, according to the technical analysis, whatever stop loss is being made is to put a stop loss. For example, if you sold a commodity at a price of ₹ 1020, its primary stop loss could be ₹ 1040. To use primary stop loss, it is very important to keep in mind the risk-reward ratio. The use of primary stop loss by using the risk-reward ratio helps to limit market losses to a large extent. We will understand further about the risk-reward ratio in the article.

2. Break-even stop loss

Now we see the break-even stop loss. Friends, break-even stop loss is applied sometime after the trend or say it is a modified form of primary stop loss. When you take a bullish position and put a stop loss below the purchased price and when the price starts going up or you say that your trade starts going into profit, then you modify the primary stop loss and put them in the exact place where You had bought. Just like you bought a commodity for ₹ 1020 and your primary stop loss is worth 1000 rupees, now you modify the primary stop loss and put it at the exact place where you bought it, which means ₹ 1020 it is called breakeven stop loss.

Similarly, when you take a bearish position and then place a stop loss above the sold price and when the price starts going down or saying that your trade starts going into profit, then modify the primary stop loss at the exact same place. Let's put where you sold curry. Like if you sold a commodity for ₹ 1020 and your primary stop loss was ₹ 1040 and you modified the primary stop loss to where you sold it, meaning that at ₹ 1020 it is called Break-Even Stop loss.

The biggest advantage of break-even stop loss is that you will not lose even if the market suddenly starts going against your trade and your stop-loss is hit. In this, you will only feel the brokerage or say that only the brokerage will happen, which will be a very small loss. By applying breakeven stop loss, you eliminate the fear of very big loss and you can see the trade with an open mind.

3. Trailing stop loss

Now we look at the trailing stop loss. Friends Trailing Stop loss is applied when you take a position in the market and your break-even stop-loss turns into a Trailing Stop loss when your position reaches a certain target. Trailing Stop loss This is the process of moving your stop loss up or down.

In a trailing stop loss, it is a stop loss that increases or decreases according to the increase or decrease of the price. In the fast position, the trailing stop loss moves upwards and in the recessionary position the trailing stop loss goes downwards to understand this better and we understand this by example. For example, if you have a bullish moving position in a commodity at ₹ 1000 and your breakeven stop loss has also become ₹ 1000, your target in this trade is ₹ 1050 and when your trade hits the target of ₹ 1000 then you will have a position Not to do one of them.

At this stage, you have to convert your break-even stop-loss into a trailing stop loss. To change it to a trailing stop loss, you have to see that whatever candle is touching the target of ₹ 1050, the last two candles and the other candles are below. Have to put a stop loss of. Similarly, if you have taken a bearish position in a commodity above ₹ 1000 and your breakeven stop loss has become ₹ 1000 and your target in this trade is ₹ 950 and when your trade hits the target of ₹ 950 You do not have to exit from the position, at this stage you have to convert your breakeven stop loss into a trailing stop loss.

To convert it into a trailing stop loss, you have to see that the last candle that is touching the target of ₹ 950 is to place a stop loss above the high of the second candle. The biggest advantage of trailing stop loss is that even if your stop-loss is hit, you will exit in profit itself, you will not have any fear of loss. It has often been seen that trailing stop-loss doubles your profits.

And the thing to keep in mind is that the trailing stop loss has to move upwards in the upward position or downward in the downward position after every new candle, meaning that the last two candles are taken out of the candlestick. Placed a stop loss of low to high or high to high.

What is the Risk-Reward Ratio?

Friends, now let us see what the risk-reward ratio is and why it is important friends. If you are investing ₹ 100000, then your stop loss should always be from 1% to 2% of the entire investment. Meaning that in a ₹ 100000 investment, your stop loss should be from ₹ 1000 to ₹ 2000. Large investors use 1% to 2% of their entire investment in a single trade.

Similarly, the risk-reward ratio is divided into 1: 3. If you apply ₹ 1 stop loss, then your target should be at least ₹ 3, which is considered a sign of an ideal and successful trader. For example, if you have taken a trade and your stop-loss is ₹ 1000, then your target should be at least ₹ 3000. Friends, this is so much about the Risk-Reward Ratio, we will understand about it in detail in the upcoming article.

Benefits of applying stop loss

Friends, let us now see what are the advantages of applying stop loss. The biggest and most important benefit of applying stop loss is that it protects you from long losses. Stop-loss acts as a kind of parachute for you. As you jump from a height while driving the sky and what if the parachute does not open at the right time after the jump, you all know very well that you can die. So it is important to open the parachute at the right time, in the same way, it is also necessary to put stop loss at the right time.

If you have not put a stop-loss, then it is similar to not putting a break at the right time, you know that by not doing this you may have an accident or face a big crisis. Similarly, you may have to face a  financial crisis by not putting stop loss at the right time.

Now we see what is the result of people who do not apply stop loss. Friends, people who do not place stop loss after taking a position in the market, they feel and do like riding in a sinking boat. Applying stop loss at the right time is the smartness to jump out of the sinking boat with the help of a life board or otherwise.

Stop-loss It works like a life board in adverse conditions in the market which you can avoid drowning by using at the right time, and yes, by not putting stop loss at the right time, your hard-earned money would appear to be sinking in front of your eyes. is. Many people know that stop loss should be installed and it is very important, yet they do not put this problem.

This question is like analyzing, it has been seen many times and my experience also says that sometimes a sudden panic in the market causes the stop loss to get hit and the price improves once the stop loss is triggered, and traders Think that he made a big mistake by putting stop loss. But the thing to understand is that after the stop loss is triggered, the sentiment can improve only once or twice out of 10, but 8 times it keeps decreasing.

And so to avoid a long decline, we must put the stop loss correctly in view of the risk-reward ratio, and because of such a situation many people do not put a stop loss, and they keep watching the market hanging and in the end, Panic comes out of the position. And that is why people have to suffer a long loss and this is a sad truth.

Friend, in the end, I would like to say that if you want to work in the market for a long time and earn good profits, then you have to use this stop loss theory. So, friends, this was the complete information about Stop loss Theory. Hope you have liked this article, if any question related to the article is in your mind, then you can go to the comment box and ask. See you only this much for today, goodbye.
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