How to deal with market capitulation? The Art of Placing Effective Stop Loss Orders

This article attempts to enlighten the reader with a few well chosen tips to ace the stock market using stop loss orders. In this post we will talk about stop loss strategies and how to deal with capitulation. These strategies if used together can reap riches for you and the best part is that you will never risk beyond what you should.

People new to stock markets can start away in a big way if they first learn about stop loss, where and when to set it. So what is a stop loss order?

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What a Stop Loss Order Really Is?

Simply put it is an order to your broker to automatically buy more stock or sell your stock once the stock reaches a pre-decided value. It is chiefly envisioned to limit an investor’s loss. For e.g. if you set a stop loss limit for 10% below the price at which you purchased it will limit your losses to only 10%.

The Safest Stop Loss Strategy

A stop loss order should be placed as soon as possible after purchasing stocks or within your first order. You should first find out the support level for that stock and then insure your stop loss level doesn’t go much below it. A support level is the level below which a stock can get a severe beating or the level the stock is not expected to fall below and has bounced back taking support from in the past too.

However, if the stock retests the support level, which we have used to determine our stop loss level, the investor needs to be wary of other investors trying to pull the selling block below the support level to trigger a selling that will get quick response from others. Hence your stop block should be carefully placed near to the major support level or depending on the amount of risk you are willing to take. After settling down on your stop loss limit, fix it to be triggered at the market price as you cannot afford to take the risk of manually placing it when things get volatile in the market. You can also set a fixed price for selling the shares however if you are dealing with a large volume of stocks it would be advisable to not follow this policy as you might end up with shares below your stop loss.

The best lesson learned without paying the price

However, the most important lesson is learnt after you pull the trigger based on your stop loss limit. At this juncture it is important to realize that to effectively trade you need to learn from this experience and start analyzing.

The reasons behind your sale could be many and varied; maybe your stop loss level was too close to the support level, or perhaps bad news created a panic in the stock market causing landslide selling, or perhaps the company you have invested in took a dive leading to your shares to go spiraling down out of control.

But the positive side would be that irrespective of when you sell out, your money would be secure apart from your loss and you can now try your hand at another stock or re-enter the same at a better price.

 

Best way of Managing Stop Loss after Capitulation

It is widely believed that after capitulation selling, it is open season in bargains. At this point all those who want to get out of the stock have already sold their shares. From here on it is a safe bet to say that the price would then reverse away from the lows. So at this point you can buy in at a low price and also set a very tight stop so that in case of a less anticipated but a possible downfall you can still escape with minimum losses.  Buying into a stock at the time of capitulation will get you profits plus will lead you to the best run you have ever had in the stock market, as buying when the rates were low and selling when the rates peak is the way to trade.

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