Stop your losses before they stop you out of the markets

The elements of good trading are 1) cutting losses 2) cutting losses 3) cutting losses. If you can follow these three rules you may have a chance.
- ED Seykota

Losses during trading in markets are inevitable. You may be a professional or novice trader but there is no escape from it. The only way to get rid of this is managing your losses by cutting your losses as early as possible before it becomes huge losses. In stock trading parlances such losses are called drawn-down. Minimizing the losses and riding the profits is one of the key to stock trading success. And there is a handy tool for the stock-traders for doing this - exercising Stop Loss Order.


Stop Loss Order - What it is?

Stop Loss Order is an order placed with your broker to buy or sell once the stock touches a certain price. This price is known as trigger price, once your stock reaches your trigger price, your order triggers as limit/market order into the market.A buy stop is placed over the market and a sell stop is placed under the market.

For example suppose that you are long in Nifty and bought it at
5020. Now you can place a stop loss order once it fall below 5000, here 5000 is the trigger price and you can place your sell price below 5000, say at 4995. Once Nifty reaches the price 5000, your sell order will be triggered into market as any normal limit/market order.

Guidelines in placing Stop Loss.

Novice traders often face a dilemma that after triggering their SL orders market reverse its course and continue in the same direction in which they took position. There are no hard and fast rules in placing stop loss orders. Traders have to use their own discretion according to their risk profile. A successful stop loss order placing comes through practice and experiences. A good understanding of the volatility of the underlying instrument helps in placing a good stop loss order. Following guidelines helps a trader to place better stop
orders

• Use percentage risk you can afford to loose in a trade.
• A good entry helps a correct SL order.
• Use major support and resistance areas ,with enough space for fake moves, for placing stop loss orders
• Use pattern borders

The above picture depicts a chart of SL's i have used while trading Nifty Options intraday. SL-0 is the initial SL and SL-1, SL-2 were trailing SLs