Protective Stop Losses

IMO,trading using 2 or 3 indicators is sufficient.More number of indicators mean
more confusion.

The other day CAG report shaved market by 100 Sensex points.No trading
analysis will predict this.

Regarding stoploss ,it different for equities and derivatives.Within derivatives
it is different for Futures and Options.

In equities a maximum gain of 20% per day (for most of scrips outside Nifty) is
permissible but in Options 100% within a day is not surprising.

i meant, in equities, how do you PROTECT your profits ?
here by stoploss, i mean protective stoploss, which is needed to be put every day for your swing trades.

thanks for your quick reply, i do value it overall.

On event driven date scrips like SBIN or INFY will see a gain or loss of 100 Rs.
Putting a target of Rs.20 from the current value on either side , on such days look RIDICULOUS.But on other days it may be WISE.Anyway DMA-20 is a line
to watch.

Hi Rishi,

A stoploss is meant to protect your position either by limiting the loss or ensuring a certain amount of profit already made. This way it is always a protective stoploss.

Taking your definition/meaning of 'protective stoploss', it means, exit after acertain amount of profit is made, irrespective of whether there is still enough potential for higher profit. That is, you will exit at a particular level.

Whatever method you use to exit, it has to be related to your entry. The method/strategy you adopt for entering a trade, you should follow the same strategy/method to exit. Even if you enter based on recommendation of a broker or your friend, the exit also should come from the same source. If your broker/friend recommends a trade, ask him when to exit.

If you are using a strategy of your own or something based on some indicators or chart patterns, use the same strategy to exit. The strategy has to have a stoploss/exit method built into it. Follow it.

One strategy I read about is like this:

Assuming you put 50000 in a stock, and you are in profit of 5000 (the value of your holdings becomes 55000), sell a portion the stock such that you get 5000 back in cash and value of your holdings goes back to 50000. Similarly, When the value of your holdings fall by 5000 (The total value becomes 45000) buy more of the stock for an amount of 5000 such that the value of your holdings becomes 50000 again. The point I am trying to show is the entry and exit are based on same concept of adjusting the value of holdings in steps of 5000. Enter with 5000, exit with 5000 (10% every time) to balance your position. The amount you took out has to be re-invested in another counter to make it earn further profits. I don't know how much this strategy gives you total profit in long run.

Coming back to strategies based on some indicators or charts, there will be a stoploss built into the system. Some times it may so happen that the stoploss remains at a much lower level compared to current price and if you wait to exit when the stoploss is hit then the profit will be reduced. In order to counter such a case, you can define an emergency exit level. For my trades I define this emergency exit as second lower low from the current bar when I am long and for shorts it is second higher high from the current bar. However, in case of unusually low or high occurring, (like the ones happen due to somebody by placing an order by 'mistake' at a price much away from current price) I ignore that bar and consider next available reasonable bar.

Although there are many methods/books describing how to place a stoploss, it is the individuals comfort level which should be followed. By looking at the previous trades you have taken you will most of the time feel that you should have exited at some other point. Comparing the actual exit points with what should have been the correct exit, you can reason out why the other exit was correct. Once you start analysing your trades and reason out your success/failure you will naturally find your comfort level where you will not regret the exits. Then stick to that comfort level stoploss.

-Anant

thank you for your enlightening post, you have accurately answered what i seeked.

kind regards to you.

anant, where would you keep a stoploss if you were to take a long position today for a swing trade, considering we trade only on daily charts.

If i buy between 784 -189 band , I will put stop loss at Rs 777 & will look for at 799 for modify stop loss at 789 , for next day my target will be 812 with stop loss at 795--so on till it hit trailing stop loss

Hi Rishi,

See the image below with annotations



If tomorrow's candle does not break the last candle low then the last candle low becomes Trailing Stop loss.

-Anant

Normally... all my positional trades start as intraday trades. If i manage to survive the day without hitting TSL... and trade does move in my direction... and is showing promise of continuation... I carry it as BTST or STBT...if we continue to show promise..it becomes a swing... and ultimately a positional trade....!

Any trade is just an assumption made on the direction of the market and every trade has an equal chance of hitting stop loss.

Stop loss is the first thing that needs to be visible on the chart. Ideal stop loss for long is below known support zone. Ideal entry is normally as close to stoploss as possible. Trade quantity is determined by the distance of entry from this stoploss and general conviction seen in the market.

Stoploss order is to be placed immediately after entry. If there is doubt about where to place the Sl..then most likely the trade was not well thought out.

Once trade is on... I monitor the health of the trade on bar by bar basis. If trade moves in my direction... then first task is to make the trade stress free. My first exit is normally a distance equal to my stoploss. Once a trade is free... i then have the courage to ride a trade with as wide stoploss as chart permits. Guppy's count back method is a good way to trail prices. Once price comes near known resistance.... its time to trail the price more aggressively. If price manages to break the resistance..with good volumes... then its time to add to positions. I caught myself a potential positional trade....!