Many diligent traders looking to limit their trading losses use a stop loss. Doing so helps them to eliminate emotional decision-making and thereby assume better control of their trades. But is this trading strategy only meant for intraday or day trading, or is it applicable for delivery trading too?
Stop loss is primarily suited only for intraday trading, as it’s used by traders looking to enter a trade for the short term. Intraday trading is more prone to volatility and sudden price changes, so stop loss helps limit losses and preserve capital. Delivery trading has a long-term outlook and is less susceptible.
Throughout this article, you’ll learn more about stop loss and intraday trading, including:
- Why stop loss isn’t ideal for delivery trading?
- How to select stop loss for intraday trading?
- The differences between intraday trading and delivery trading
So, without further ado, let us get started…
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Is Stop Loss Only Applicable for Intraday Trading, or Is It Also Good for Delivery Trading?
Stop-loss orders are only applicable for short-term or day trading. When you enter a stop-loss order on a trading platform, it goes live once the market opens until it closes. It also remains active unless you cancel it manually or the price gets a hit.
In other words, stop loss limit orders are only valid for intraday trading. At the end of the trading day, they get canceled, which means you need to place new stop-loss orders every day on each of your trades, unless the order you placed is with a good till cancelled instruction.
Can You Set Stop Loss for Delivery Trading?
You can’t set stop loss for delivery trade since, ideally, stop loss orders are set for day trading. This means that any buy/sell order that goes past a day’s trading becomes a delivery order for the following day, thus losing its stop loss order status.
What Is the Difference Between Intraday Trading and Delivery Trading?
Intraday trading entails buying and selling shares within a single trading day. A trade becomes a delivery trade when you fail to square off your position. Furthermore, both options utilize different trading strategies. Let’s first have a closer look at their differences:
| Intraday Trading Features | Delivery Trading Features |
|---|---|
| 1. Buying and selling stocks within the same day | 1. You own any stocks you buy until you decide to sell them |
| 2. Low commission fees | 2. You can hold on to your stocks for as long as you wish |
| 3. No overnight risk | 3. Limited losses |
| 4. High liquidity | 4. Can access corporate benefits |
| 5. Low capital requirements – use margin funds |
Now, let us also look at some of the common cons of both these trading disciplines:
| Cons of Intraday Trading | Cons of Delivery Trading |
|---|---|
| 1. Higher risk of losing | 1. Low liquidity – no margin funds |
| 2. Needs constant monitoring | 2. Lacks leverage – limits high returns |
| 3. No corporate benefits -dividends, rights issue |
Differences in Trading Strategies: Intraday vs Delivery Trading
Intraday Trading
- Trades are time-sensitive; hence there are fewer chances to reduce losses or exit trades at a high price, thus bringing in the need to use stop losses.
- It’s advisable to trade with large-company stocks because they boast high trading volumes; therefore, the prices change materially within short time frames.
- Intraday trades are primarily based on short-term price movement predictions made using technical indicators (or events), but these don’t give indications about long-term success.
Delivery Trading
- Volatility has minimal effect on long-term trades since you can hold and sell when your stock attains your target price.
- Unlike intraday trading, you can increase your investment period, wait for the price to rebound, or revise your target if you fail to reach your target price.
- For delivery trading, it’s best to invest in companies with solid long-term prospects, which calls for fundamental analysis.
How Stop Loss Works for Intraday Trading?
The stop loss order is designed to prevent a bad trade from worsening, thus limiting the amount of loss that could occur. Markets are typically volatile and unpredictable, a situation that worsens with intraday trading. This increases your level of risk.
Fundamentals drive markets in the long run, but factors like fear, bad news, or greed affect markets in the short term. Intraday trading hence calls for you to be extremely cautious, and this explains why you need to use a stop loss; to insure your investments.
You assign the stop loss level on choice stocks before trading officially begins. When a stock price attains the preset stop loss level, the transaction automatically closes (the stop loss executes). This allows you to save the remaining invested money.
What Makes Stop Loss Useful for Intraday Trading?
Stop loss is an invaluable tool for traders due to the following reasons:
- It can be applied to prevent huge losses when the market goes against your position.
- It’s useful for protecting trading capital.
- It can help lock in profits.
- It helps maintain discipline during intraday trading.
- It provides protection when the market turns volatile.
- It allows you to have more control over your account.
- It makes your trades more cost-effective.
- You get to decide precisely how much value (in dollars) you’re willing to risk.
- It gives you the flexibility to monitor multiple deals on the open market.
The Downsides of Using Stop Loss
Stop loss is an excellent tool for reducing trading losses and maximizing returns, but it also has downsides. These are:
- Short-term price fluctuations in a volatile market could trigger the stop loss much faster than expected.
- Using stop loss without the necessary know-how puts your investments at risk.
Due to the above shortcomings, it’s always advisable to use stop loss alongside other trading strategies such as technical or fundamental analysis.
Still, not all traders know how to determine where to set their stop loss levels. This is a crucial step because setting stop losses too far off could lead to massive losses if the market moves in the wrong direction. Again, if you put them too close, you might make the mistake of getting out of a position sooner than expected.
So how do you set a stop loss effectively?
How To Set Stop Loss for Intraday Trading?
As mentioned before, a stop loss order is usually set to buy or sell the moment the stock price hits the set trigger price. For instance, if you buy a stock at $100 and can only afford losses up to $95, you place a stop loss order at $95. This becomes your trigger price and $94.5 the limit price. When the price falls to $95, the $94.5 order gets a trigger.
Note that while you can modify a stop loss order, once it gets triggered and partially executed, you can no longer change it. Again, a stop loss is a form of risk management, but it doesn’t guarantee profitability.
There are various ways to set stop loss for intraday trading:
- The percentage method. This is pretty straightforward as you only need to decide on what percentage of the stock price you are prepared to give up before exiting your trade.
- Moving averages method. Here you place your stop loss below a long-term moving average price instead of short-term prices.
- The support method. This is more challenging to implement. It entails using hard stops at a set price whereby you determine the most recent stock support level then place your stop loss order slightly below the level.
- Indicator stops. These rely on larger trend analysis and are used alongside other technical indicators.
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Conclusion
Stop loss allows you to predetermine how much you can afford to lose in a given trading position. As such, it protects you if and when your trade goes the opposite direction from the expected movement or fails to favor you. The trade becomes unprofitable, but with a stop loss order, you can minimize the loss.
With intraday trading, profits can multiply, but so can losses. It’s therefore essential to have a stop loss order in place so you can make the most of the trading opportunities available in the market.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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