Friday 14 November 2008

STOP LOSS - A PUZZLE OR....

There is a big difference between investor and trader.Investor buy and sleep,he never bother for stop.whereas trader can not survive without stop loss.

Stop lose is like bullet-proof for trader.

In simple words 'stop-loss is a squaring-off order for a trade that is going in wrong direction'.so that the loss on the wrong trade could be minimized or limited.

Stop mental or physical.......I will not go in detail here and directly comes on point......the trade should be not placed without stop. No mental stop please.......because there are only few people who are capable to control themselves else 90% of peoples who use mental stop normally hesitate to cut the position........
but before placing the trade or stop It is better to understand where the stop should be used and where hedge......

Normally.....in an established market stop works well......if stop hit .....reimburse the trade or forget.....and look for other target......but in volatile market stop become suicidal point......it hurts....so better to hedge the position.

My personal opinion......use the stop with stocks......and hedge the position while trading Index.

Now.....what should be the level of stop......?

Well......few peoples use a certain percentage......some peoples use a fix stop like 5 rs 10 rs......few other use support based stop......

Operators.....normally try every trick....and drive in crazy way....some time stop hit the bottom/top go little lower/higher and return.......false break-outs/break-downs.... these are the basic problems......there is no solution.....so in my view a Volatility based stop is much better than other types......and that can be calculated on hourly or 30 minuets time frame......formula is.......

Range calculation ....high-low/previous day's close*100 = VS%

now divide the VS% by a suitable number (2,4,5......)

and now .....hourly support or stock price -VS%

this formula is for long........for short we add the % VS to hourly high or nearest resistance.

here is a small example.....BHEL (Today's first hour)high 1760 low 1743 , previous close 1760.25.....so use the stop at 1742 or calculate......

Range = High- Low , 1760-1743 = 17
divided by previous day's close 1760.25 = .96%

Now this .96% can either be used as stop or divided it by a suitable number for example .......divide it by 2= .48%or say .5%

Now if the trader is buying 1748 levels.....stop should be at 1748-9 (1748*.5%)=1739. So if the stop hit at 1739.......forget or go short.

VIA - Tu Daal Dal Main Paat Pat