How to Stop Loss in Share Trading
- 1). Determine what percentage of your investment capital, or what exact dollar amount, you are willing to risk. If you have $5,000 to invest in a particular stock that is priced at $5 per share you may decide you only feel comfortable risking 20 percent of your capital, which would be $1,000. If that is the case, you would want to place a stop loss order at $4 per share.
- 2). Decide how long you want the stop loss order to stay in effect. When placing the stop loss order on your shares you must indicate if it is a "day" order or if it is a "good till canceled" (GTC) order. A day order will expire at the end of that trading day. A GTC stop loss order will stay in place until you instruct the stock broker to cancel it.
- 3). Calculate the stop loss price for short trades by determining what price you would have to sell to limit your losses in a rising market. Consider the previous example where the investor has $5,000 to trade a stock selling for $5 a share, and can only risk 20 percent for her capital. If she sold that stock short at $5, betting the price will fall, she would want to set the stop loss at $6 a share. In that scenario, if the market turns against her she will lose only $1,000.
