In trading whether in stock market or forex , stop loss is a must. With this trading feature, trader can reduce risk without worry when he/she leave monitor. But the problem is how to put stop loss in the right place?
A stop loss is an order placed with the broker that will automatically sell or close your order when the stock you are trading reaches a certain price.Most brokers will allow two types of stops – good until cancelled- (GTC) and -good for the day.- GTC will hold the stop loss value even market is closed in the evening, usually until a month.
Although most traders advocate placing stops, it is worth noting that this practice has its skeptics. Long-term, fundamentally oriented investors will tell you that when a stock goes lower, it doesn't necessarily mean you should sell. In fact, if the fundamental story that motivated the purchase remains intact, it might actually signal a buying opportunity instead. Critics of stops will point out several disadvantages of the stop loss order. By placing the stop you are guaranteeing that, should your trade move in the wrong direction, you will end up selling at lower prices, not higher. If you are unsure about the position, then why not just bite the bullet and sell instead of waiting for a decline to take you out of the trade?
A key question for swing traders is exactly where to place a stop loss. In other words, how far should you place the stop below your purchase price? Many traders will tell you to set a predetermined "maximum acceptable loss" amount based on your personal account rather than technical analysis of the stock in question. One line of thinking says that you should not lose more than -2% of your equity on any one trade.
Another method of setting stop losses is to predetermine an arbitrary percentage of your purchase price you are willing to lose. One well-known figure -- suggested by William O'Neil, publisher of Investor's Business Daily -- states that you should never lose more than -8% of your position on any given trade.
Although predetermined amounts are useful for preventing unacceptably large drawdowns in your account balance, they unfortunately have nothing to do with the stock's behavior itself. The market doesn't know at what price you bought the stock or what your overall account balance is, nor does it care. As such, stop losses that are set as arbitrary amounts leave traders vulnerable to being kicked out of a position for no reason other than normal market volatility.
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