Primary Stop Loss:
It is a level below trader’s initial buy price. It can be a fixed percentage based level, where trader put stop loss at 10% to 25% below trader’s initial buy price as per trader’s comfort level to take loss. Active approach in which we put stop loss based o crucial supports on charts. If that crucial established support is broke then trader cut losses and exit the stock. It could be 21 day average in case of short term established trend and it could be 50 day moving average support I case of medium term established trend. Depending on our horizon, trader must keep stop loss levels and adhere to them strictly, so that trader don’t suffer decision paralysis like most people do due to scenario.
Trailing Stop Loss:
Trailing Stop Loss is a level above our (trader’s) initial buy price.This kind of stop loss enable us to take a certain portion of profits in worst case scenarios. If trader is having the profit of 75% then we need to ensure that our trailing stop loss should be such, so that we are able to take most of the profits. Trader may not take entire 75%, but trader can take at least 50%, if we employ trailing stop loss technique in portfolio. This makes sure that even if markets keep crashing, we will exit taking major portion of our profits, and not losing our profits and capital in bear phase of market, like most traders do. Most traders don’t employ trailing stop loss, even worse, they fail to employ primary stop loss, and watch stocks not only losing all its profits, but getting into negative territory generating negative returns. Trailing Stop Losses ensures that we always get a positive return on a stock that has done well for us. People fail to put trailing stops and in most cases, even though they are making in some stocks, when the market’s decline they let the profits erode, and try to give themselves false consolation that only profit is lost, so no need to worry. But stock market is not a place for time pass. If we are not going to take profits then no use of investing stock market. Trailing stop loss is like a safety net. Which ensures that when bull run turns into bear market most of trader’s profit on capital is taken.