Stop loss Order: An order placed with a broker to sell a security when it reaches a certain price. It is just to limit an investor's loss on a security position. A simple example... u bought 10 shares of RIL @ 2400 and expected to reach 2450 the same day but instead of rising it started falling down 2390.... 2380.... 2370.... and more.... what to do in this situation would u book the loss at 2360 or hold the stock for some more days. A smart trader would keep a stop loss of Rs 15 in his mind (Ofcourse he knows that if the stock fell beyond Rs 15 it could fell further down)So when the trader buy 10 RIL @ 2400 at the same time he puts a stop loss order of to sell all the 10 shares @ 2385. It means if the stock start falling and reaches 2385 mark all the shares will be sold @ market price. Whats the benefit of doing that... he can now buy the same stock @ 2370 again.Now if the stock start rising then again u can use this stretegy... like if the stock rises to 2430 and you are unsure that whether it will rise or fall, u can place or modify ur earlier stop loss order to 2425 ... so that it should be sold automatically if tries to fall beyond that point....Its just a like a boundry line u have placed because u want to limit ur losses upto a certain extent....Same is the case with stop loss buy order... if the share at Rs 100 is rising to 101, 102 .... and u know that if it crosses 103 it will zoom to 106, 107 and u want grab it at any cost put a stop loss buy order at 103.... if it remains below 103 or further fall below then no harm as u wont get the shares and u r safe. and if it reaches 103 and u got the shares and it reaches 105,106 u r in profit...But u have to be determined about support and resistence levels of the shares in both cases
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Thursday, April 10, 2008
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