The Importance Of Trailing Stop Loss In Intraday Trading

Intraday trading is a popular form of trading where traders buy and sell stocks within the same trading day. While it can be a profitable venture, it also comes with a high level of risk.
Risk management is crucial in intraday trading to protect your investments and minimize losses. One of the most effective risk management strategies is the use of trailing stop loss.

In this article, we will discuss the importance of trailing stop loss in intraday trading and how to use it effectively.

What is Trailing Stop Loss?

Trailing Stop Loss is a type of stop loss order that allows traders to set a stop loss order at a specific percentage or price level which will then automatically adjust itself in response to changes in the price of the stock.

The difference between a regular stop loss and a trailing stop loss is that the trailing stop loss moves with the market price.

As the market price increases, the trailing stop loss also increases, but if the market price decreases, the trailing stop loss remains the same.

Importance of Trailing Stop Loss in Intraday Trading:

Trailing stop loss is an essential tool for intraday traders as it helps to limit losses and protect profits. Intraday trading is a fast-paced environment, and prices can change rapidly. Trailing stop loss allows traders to set a predetermined exit point, which is automatically adjusted as the market price moves. This means that traders can protect their profits while still allowing for potential gains.

How to Use Trailing Stop Loss in Intraday Trading:

To use trailing stop loss effectively, traders need to determine the appropriate percentage or point to set the stop loss. This will depend on the volatility of the stock and the trader’s risk tolerance.

Percentage base Trailing Stop Loss:

If a trader is trading a highly volatile stock, they may set a trailing stop loss at 5% below the market price. If the stock price increases, the trailing stop loss will also increase, but if the stock price decreases, the trailing stop loss will be triggered, and the trader will exit the trade.

Example of Percentage based Trailing Stop Loss:

Suppose you buy shares of ABC Ltd at Rs. 100 and you set a trailing stop loss of 5%. This means that if the stock price falls by 5% to Rs. 95 the stop loss order will be triggered and your shares will be sold automatically.

If the stock price of ABC Ltd increases to Rs. 110, the trailing stop loss will also increase to Rs. 104.50 (5% below Rs. 110). If the stock price then drops to Rs. 104.5, the trailing stop loss will be triggered, and the trader will exit the trade with a profit of Rs. 4.50 per share.

If the price of ABC Ltd rises to Rs. 120 your trailing stop loss price will also rise to Rs. 114 (5% below Rs. 120).

Example of Percentage based Trailing Stop Loss:

Suppose you buy shares of ABC Ltd at Rs. 100 and you set a trailing stop loss of 5%. This means that if the stock price falls by 5% to Rs. 95 the stop loss order will be triggered and your shares will be sold automatically.

If the stock price of ABC Ltd increases to Rs. 110, the trailing stop loss will also increase to Rs. 104.50 (5% below Rs. 110). If the stock price then drops to Rs. 104.5, the trailing stop loss will be triggered, and the trader will exit the trade with a profit of Rs. 4.50 per share.

If the price of ABC Ltd rises to Rs. 120 your trailing stop loss price will also rise to Rs. 114 (5% below Rs. 120).

Fixed Point based Trailing Stop Loss:

Apart from percentage-based trailing stop loss, traders can also use fixed point trailing stop loss. In this method, traders set a fixed amount below the market price as the stop loss.

Example of Fixed Point based Trailing Stop Loss:

For example, if a trader buys a stock of ABC Ltd. at Rs. 200 and sets a fixed 10 point trailing stop loss at Rs. 190, the stop loss will be triggered if the stock price drops to Rs. 190 or below. This method is useful for traders who want to set a specific exit point regardless of the stock’s volatility.

If the stock price of ABC Ltd increases to Rs. 220, the trailing stop loss will also increase to Rs. 210 (10 point below Rs. 220). If the stock price then drops to Rs. 210, the trailing stop loss will be triggered, and the trader will exit the trade with a profit of Rs. 10 per share.

If the price of ABC Ltd rises to Rs. 240 your trailing stop loss price will also rise to Rs. 230 (10 below Rs. 240). If the stock price then drops to Rs. 230, the trailing stop loss will be triggered, and the trader will exit the trade with a profit of Rs. 30 per share.

How to setup Trailing Stop Loss:

To set up a trailing stop loss for intraday trading you can use your trading platform’s order entry system.

Most trading platforms allow you to set a trigger price and stop-loss price based on a percentage or a rupee value.

You can then choose the trailing activation value and the trailing stop loss value to automatically adjust the stop loss order when the stock price moves in your favor.

Final Thoughts

Using a trailing stop loss is a crucial component of effective risk management in intraday trading. It can help you minimize losses, protect your capital, and maximize profits. However, it’s important to note that this strategy should be used in conjunction with other risk management techniques, such as position sizing and diversification. By implementing a comprehensive risk management plan, you can increase your chances of success in the highly volatile world of intraday trading.