In this chapter, you are going to learn about how to use stop loss in day trading like a pro. Stop-loss orders help you in limiting your losses. Before entering a trade look at your stop loss level and calculate how much money are you going to lose in a single trade. This is crucial if you want to succeed as a day trader.
What is stop-loss in day trading? -The Definition
Stop loss is the maximum loss which you are willing to take on a trade. It helps you control your losses in day trading.
As we discussed in Chapter 2-Risk management, in day trading your stop loss will determine the quantity you are going to trade. Once after placing the stop-loss order, it becomes a pending order. When price reaches stop loss level, the pending order gets executed as a market order and your position is squared off. So whether you buy or sell financial security in day trading, stop-loss orders are a must as it prevents you from depleting your capital.
Trailing stop-loss orders
Every day trader, must use stop-loss orders and those who don’t use stop-loss orders are prone to the highest risk in day trading. If you are a clever day trader, you will look to convert your risky trade into a complete no loss trade. This is done by using trailing stop-loss orders. You can either use automatic trailing stop-loss orders available with many stock brokers trading platform or you can trail your stop loss manually.
For example, if you make 2% profit on your day trade, you should look to shift your stop loss from the initial stop-loss price to the price at which you entered the trade. When you do this, you are completely risk-free in your trade. You can keep trailing your stop loss as your profit progresses. So when you reach a 4% profit shift your stop loss at a 2% profit price level.
This way your overall trading statistics can improve drastically. If you are reading this guide from chapter 1, you have completed the 4 most essential topics of day trading. Now its time to move forward to learn how to determine whether to buy or sell on a particular trading session. So head over to our Chapter 5-Market direction for the day.