### Stop Loss

POSTED BY ON December 10, 2010 2:27 pm COMMENTS (4)

can somebody let me know what does in mean by stop loss in stocks and if possible give a example. As i find it very hard to understand ..

1. Ramesh Mangal says:

The eternal headache is after you buy a stock and its price comes down, then what is to be done – Stop Loss or Average Down!

Also the reverse, if it goes up, Book Profit or Average Up!!

Ramesh

1. I want to explain the query on technical chart. However, there is limitation of posting image here. So, let me explain in simple way.

Why do you want to average when price comes down? If you’re dead sure about fundamentals of the company and overall bull market. But price may come down another 20% after you do average.

Now, if you book profit when the price moves 10% above your buy price, and the next day, the stock moves another 20% up, you’ll regret.

This discussion & problem is endless. There are 2 solutions.

1. Buy, Sell and make stop loss based on technical rules and not numerically. Just because you’ve bought some shares, that does not mean the price of the share will move up.
http://www.investmentkit.com/dodacharts/stockmarketchart/showchart.shtml

2. Forget all the above points, and invest in equity diversified mutual funds and give all headache to fund manager. 🙂

2. Ramesh Mangal says:

@Prashant

Please refer to the answers posted earlier for a similar question by Purna.

Ramesh

3. Stop-loss is the figure after which you’re unable to bear any loss.

There are 2 ways to set-up stop loss.

1. By manual calculation: For example, you buy stock ABC @Rs.100. You can take a risk of 5%, so you place your stop-loss @Rs.95. If the price touches 95, it will sell. Next day, the price moves up Rs.5 i.e. @Rs.105, so you move stop-loss @Rs.100 – that’s your break even point. 3rd day, the stock moves 110 and you move your stop-loss @105 and so on. In this way, you’re not only increasing your trailing stop-loss but also confirmed some sure profit from this trade.

2. Another way to get stop-loss using some technical indicator like ParaBolic SAR or Kijun-Sen of Ichimoku. Search Google for such terms to learn.