Stop Loss - An Important Aspect of Day Trading

Saturday, October 31, 2009

Stop loss is an important aspect of day trading. Let us discuss the meaning of it.

It is a mechanism by which a trader can determine the amount of loss he is ready to undertake in case of a day trade. Let us discuss it with an example.

Let us assume that Mr. Smith is buying 100 units of stock X at the rate of 50. He has decided to sell of the units if the price of them falls below 48. So in this case, he can choose 48 as a stop loss. If he inputs the particular amount as a stop loss for his trade in his trader terminal, all his stocks will get automatically sold when the unit price of his shares will reach 40.

Today trading or day trade is done through computers and trader terminals. Every terminal has a box to set it up. Any person can input his target in the said box.

Trading is subjected to market volatility. Thus there may be condition when a stop loss may fail to get triggered if the amount of trade done is very high. It may not be possible to sell huge volumes of stock if the fall in the price is too sharp or too fast.

It can also fail to get triggered due to machine or technical failure.

It is important as it helps to minimize the loss of capital and maximize the chances of capital protection.

Thus it is a very important part of day trading as money saved from being wasted is always equivalent to the amount of wealth earned.

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