Intraday trading, the practice of buying and selling securities within a single trading day, can be a path to considerable profits. It often presents numerous challenges to traders.
One such challenge is managing the inherent risks while securing hard-earned profits. Fortunately, two tools can help traders navigate these tricky waters. These are Stop Loss and Take Profit orders.
This article aims to delve deep into these two tools, explaining their work, importance, strategies for setting them, and how to avoid common mistakes. It aims to provide a comprehensive solution to these pain points.
The Science Behind Stop Loss and Take Profit Orders
Stop Loss Orders
In intraday trading, the phrase ‘Stop Loss’ is more than just two words. It is a safety net. Stop Loss orders are directives a trader gives to sell a security when it reaches a certain price.
You are protected from substantial losses even if you are not actively monitoring the market.
- How do Stop Loss Orders Work in Theory:When you place a Stop Loss Order, it remains dormant until the stock price reaches your predefined stop price. Once triggered, the stop loss order becomes a market order and executes at the next available price.
- How They Operate in Practice in the Indian Markets:Suppose (fictitiously) that Rohan bought shares of XYZ Ltd. at Rs 200 per share. He places a Stop Loss Order at Rs 190 to limit his loss. If the share price falls to Rs 190, the order gets triggered, and the shares are sold at the next available market price, minimising Rohan’s loss.
Take Profit Orders
If Stop Loss orders are the defence, Take Profit orders are the offence in intraday trading.
They are directives to sell a security once it reaches a certain price level, securing your profits before the price drops again.
- How do Take Profit Orders Work in Theory:It remains dormant until the price reaches your predetermined level. Upon reaching, it becomes a market order and sells the security at the next available price.
- How They Operate in Practice in the Indian Markets:Suppose (fictitiously) that Priya bought shares of ABC Ltd. at Rs 500 per share, hoping their price would increase. She places a Take Profit order at Rs 510. If the share price reaches Rs 510, the order gets triggered, and the shares are sold at the next available market price, ensuring Priya secures her Profit.
Importance of Stop Loss and Take Profit Orders in Intraday Trading
Unlike other forms of online trading, intraday trading is a game against the clock in which Stop Loss and Take Profit orders play a crucial role.
- Role of Stop Loss Orders in Risk Management:Stop Loss orders limit the trader’s exposure to risk. They prevent spiralling losses when the market moves against your expectations. Specifying a ‘stop price’ ensures you don’t lose more than expected.
- Role of Take Profit Orders in Securing Profits:What is trading’sbiggest challenge?’ The biggest challenge is to know when to exit. Take Profit orders come in handy. By predetermining the exit point, you lock in your profits before the market reverses.
Strategies for Setting Effective Stop Loss and Take Profit Points
Setting the right Stop Loss and Take Profit points requires skill and understanding of the market.
Here are some strategies that can help:
- Analysis of Market Trends and Volatility:Market volatility is crucial when setting these points. Greater volatility usually calls for wider Stop Loss points.
- Setting Stop Loss and Take Profit based on Support and Resistance Levels:These levels, where the price tends to halt and reverse its course, serve as excellent points for setting Stop Loss and Take Profit orders.
- Utilising Fibonacci Retracement Levels:This technical tool helps traders identify potential reversal levels and can be used to place effective Stop Loss and Take Profit orders.
Common Mistakes When Using Stop Loss and Take Profit Orders and How to Avoid Them
Mistakes are common even with an understanding of ‘what is trading‘.
Here’s how you can avoid them:
- Setting Too Tight or Too Wide Stop Loss Orders:Setting a Stop Loss too close to the buying price often triggers the order prematurely. On the other hand, a Stop Loss set too far can lead to significant losses.
- Not Adjusting Take Profit Orders in Response to Market Changes:Like Stop Loss, Take Profit should also be flexible and adjusted according to market performance.
- Ignoring Market Volatility:Market volatility can cause drastic price changes. Not considering market volatility can trigger Stop Loss and Take Profit orders either too early or too late.
We hope you understand what intraday trading and other aspects are.
Stop Loss and Take Profit orders, if used effectively, can be powerful tools in intraday trading. They provide the much-needed balance between risk and reward. By understanding these tools and using them strategically, you can navigate the volatile waters of intraday trading with much greater confidence and success.