For day trading, you have to always use a stop loss. By that stop loss, you will know your possibility to lose money in a trade. Therefore, you have to learn how to calculate stop loss in day trading to determine where it will go.
Placing the right stop loss
To place a stop loss in the right place, a day trader have to find the position that will tell you if you are wrong about the market conditions if it hits. In other words, it helps you to have better risk management as you start day trading.
As a trader your chance to get the luck of exact timing on all of your trade is really thin, thus, you need the right stop loss to make successful trades.
For the guideline, place the stop loss price below the recent price bar low, when you buy stock in single trading. Your strategy or trading styles will essentially affect the price bar to place the stop loss. If the price movement consistently goes below, when you expect price moves up, then that’s the time to exit the trade.
While for short selling, the guideline is to put a stop loss above a recent price bar high. It is also varied by your chosen day trading strategy, the price bar you select to place your stop loss.
Similar to when you buy, when the price continuously goes high when you expect it to go low, then, that is the time for you to exit.
Also read: How Long You Should Hold your Stock in Day Trading Position?
Calculate the placement
There are two ways to calculate stop loss placement in day trading. They are cents/ticks/pips at risk and account-dollar at risk.
Cents/pips/ticks at-risk work better for simply relaying information. For instance, your stop is at X and long entry is Y, so you can calculate the difference with this following formula:
Y minus X = cents/ticks/pips at risk
On the other hand, to calculate the number of dollars in your account you put at risk, first, you need to know the cents/ticks/pips at risk. Besides, you need to know your position size. In the stock market example, you have $0.06 of risk per share.
If you have a position size of 1,000 shares, then you are risking $0.06 x 1000 shares = $60 on the trade (plus commissions). For the EUR/USD example, you are risking 6 pips, and if you have a 5 mini lot position, calculate your dollar risk as:
Pips at risk * Pip value * position size = 6 * $1 * 5 = $30 (plus commission, if applicable)
