How to Calculate the Stop Loss in Intraday Trading

Intraday trading involves buying and selling within a single day, and due to market volatility, managing risk is crucial. A stop loss is a key tool that automatically triggers a sale when the price moves unfavourably, limiting potential losses.

A stop loss is an order to buy or sell a security when its price hits a set level, limiting losses. It's crucial in intraday trading to manage risk and prevent holding losing positions too long.

The calculation of stop loss can be done using different methods depending on your risk tolerance, market conditions, and trading style. The most basic calculation is the percentage-based method.

Formula for Stop Loss Calculation:

• Stop Loss = Entry Price - (Entry Price × Percentage Risk)
  

For example, if you bought a stock at ₹1,000 and are willing to risk 2% of your capital on the trade, the stop loss calculation would be:

• Stop Loss = ₹1,000 - (₹1,000 × 0.02) = ₹1,000 - ₹20 = ₹980
  

In this example, you would set your stop loss at ₹980, meaning if the stock price falls to ₹980, the position will automatically be sold, preventing a further loss.

Choosing the Right Percentage Risk:

The percentage risk can vary based on your risk tolerance and trading strategy. Common percentage ranges are between 1% and 3% of your capital per trade. More conservative traders may choose a lower percentage to minimise risk.

There are various methods of placing stop loss orders. Let’s explore some of the most commonly used methods by intraday traders:

Fixed Percentage Method

This method involves setting the stop loss at a fixed percentage of the entry price. It is one of the easiest and most straightforward ways to calculate stop loss.

• Pros: Simple to use, easy to understand, doesn’t require advanced technical analysis.
  

• Cons: Doesn’t take into account market volatility or support/resistance levels.
  

Support/Resistance Method

In this method, traders set the stop loss near key support or resistance levels, where prices tend to reverse direction.

• Pros: Aligns with market structure, often more reliable in volatile markets.
  

• Cons: Requires technical analysis and familiarity with chart patterns.
  

ATR (Average True Range) Method

The ATR method calculates stop loss based on market volatility, setting it a certain number of ATR values away from the entry price.

For instance, if the ATR value for a stock is ₹5, and you set your stop loss at 1.5 times the ATR, your stop loss would be ₹7.5 away from the entry price.

• Pros: Adapts to market volatility, providing a dynamic approach.
  

• Cons: Requires understanding and using technical indicators like ATR.

Setting a stop loss is not just about choosing a percentage or level; it's also about avoiding common mistakes that can impact your risk management:

• Setting stop loss too tight: Many beginners set their stop loss too close to the entry price, resulting in being stopped out frequently due to normal market fluctuations.
  

• Not adjusting stop loss for volatility: Ignoring the volatility of the market can lead to unnecessarily tight stop losses in volatile markets, causing premature exits.
  

• Ignoring market trends: Setting a stop loss without considering the prevailing market trend can result in getting stopped out during normal retracements.
  

 

A stop loss offers several benefits for traders:

• Minimising Losses: It limits the maximum loss per trade.
  

• Emotional Discipline: It prevents hesitation in exiting losing positions.
  

• Protecting Profits: Trailing stop losses lock in gains while allowing the trade to run.
  

 

In intraday trading, calculating and setting a stop loss is crucial for managing risk, with methods like fixed percentage, support/resistance, or ATR based on your trading style and risk tolerance.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.