Dear Anant Sir,
Can you explain how to make use of trailing SL in SingleMA trading system? I am confused with trailing SL nos on the graph. As the days goes on from the chart trailing stop loss keeps on increasing. In that process many times stock hits trailing stop loss on the chart but we are not closing the trade. Why is it so?
Further, I have observed that many times after hitting trailing SL stocks moves up and takes a long rides. I am wondering how can we get along this problem without missing the long rides. Also, if we dont follow the trailing SL funda and just follows the Buy Sell signals (which is the case right now) then many times profit gets washed away?
Hi Dipesh,
If you follow a system completely mechanically (blindly follow the triggers as they come and act on them immediately) then this type of problems will be encountered. Therefore, it becomes necessary to evaluate the triggers personally (human intervention and decision making) by referring to the charts so that at least some of the false triggers can be avoided.
Trailing stop loss always follows the price direction. The first rule of trailing stop loss is "NEVER CHANGE THE TSL IN OPPOSITE DIRECTION". When you go long and as the days pass by, the trailing stoploss increases as the price increases. When the price falls you should not reduce the trailing stop loss, keep it at the present level. If the price goes below TSL just quit. When you short, the TSL goes on reducing as the days progress and price falls further. When price increases the TSL is not increased but held at the current level. If the price rises above TSL then cover your short (square off or buy).
Experienced traders sometimes go against the stop loss becuse of some indications which tell them that the stoploss trigger would reverse shortly. This happens when the TSL is near a support level (in case of long trades) or near a resistance level (in case of short trades). In such situations it would be better to see whether support/resistance levels are broken or the price reverses from those levels. This involves some risk of losing more money if the levels are broken but it also protects us from early exit in case the levels are not broken.
In case you are feeling uncomfortable with obeying TSL you can follow a thumb rule:
1) If the TSL is broken but the Single MA is a little below the TSL then wait for the price to fall below the Average (Sell trigger).
2) If the TSL is quite above MA line and price goes below TSL then exit (either completely or partially). Then Keep a watch on the price movement thereafter. If the price goes up again without giving Sell trigger (Price not falling below MA) then re-enter when the price goes above TSL (preferably the whole candle should go above TSL).
These will result in minor losses but you will not miss a big move after hitting TSL.
Even with these thumb rules you are not protected completely. Market can still go against you. But it is part of trading. You should be able to absorb such market moves and go ahead with your trading and make profits later.
-Anant
