Stop Loss is a pre-determined limit set by you within the system beyond which your capital cannot suffer losses. In short, it is your risk-taking capacity.
How to determine Stop Loss?
Stop Loss is important as it helps your capital to protect itself from deterioration in a bearish market.
- Determine on how much capital you are planning to trade on
- Ask yourself this question – How much loss can I bear?
- Before trading, place your Stop Loss accordingly
- Ideal ratio between CMP to SL and CMP to Target Price should be 1:2. This means you are ready to loose Re 1 against a potential gain of Rs 2.
- It help your remain a disciplined trader.
Suppose you plan to trade on Rs 1 lakh. Reliance is trading at Rs 1450. You plan to take a trade with an expected Target Price of Rs 1500. So, since your potential gain is Rs 50; your Stop Loss should be Rs 25. Hence, your Stop Loss should be Rs 1425. This implies a risk-reward ratio of 1:2.