= SL (Stop loss)..........Because, u can't make profit without trading; u can't trade without taking risk (nothing is 100% sure); u can't (and shouldn't) take risk without SL (Stop loss).
It is such a simple tool and so much discussed that the poor fellow gets buried down in the discussion. Everyone talks of technical indicators but no one gives the hero's position to Mr.Stop loss.
Stop loss is to trading what ejection button is to the fighter pilots. Stop loss is like a fire extinguisher, like a hand brake, like a safety net in circus, like safety valve in pressure cookers, like airbags in cars.....
Remember, there is always 50% chance of winning (why - because the stock can either go up, or go down, there is no third way, it can't pop out of the screen). All u have to do is try and increase that %age by ur knowledge/indicators/analyses. Even without analyses, a person will be 50% right in the long run.
Stop loss can be very very useful. I have seen people who enter any trade with tight and small stop loss. if it goes their way, they profit. if it doesn't stop loss gets triggered with minor loss. (I am not asking u to do that, but just wanted to discuss the utility of stop loss)
Stop loss is like a gun. If u have one in ur pocket, u don't feel scared walking thru the streets at 12 in the night.......So, friends, use stop loss and trade freely...without fear....
Stop loss may be decided in the following ways :-
1) 50% (maximum; and that to if u don't know any other method) of the target (but on the opposite side). e.g. if the CMP of stock is 100 and ur best judgement of the target is 110, then 95 can be a stop loss (assuming u don't know any other method of deciding stop loss). This will give u 1:2 risk reward ration.
2) Another way to calculate stop loss is the nearest value in the opposite direction which, according to ur technical analyses, can't be broken under the circumstances, and which, if broken, would mean that factors beyond ur understanding are active in the market and hence the need to trigger stop loss, e.g. in the above example, if ur technical analyses suggests that price can't go below 97 in any case, then 97 can be the stop loss,
3) Another way to calculate stop loss is by 10 DMA (Day moving average), 20DMA, 50DMA, 200DMA etc. depending upon whether u r trading for immediate or short or medium or long term,
4) Important / nearest support and resistance levels can also be taken as a stop loss,
5) A psychological way of deciding a stop loss is by asking urself = below which level i will not be comfortable in the trade......remember - stop loss shouldn't be so near that there is no room for the normal dance/vibration of the stock and shouldn't be so wide that it is as good as not having any stop loss.
Stop Loss is like a life jacket...strap it around and swim the trades without fear...it will not let u drown...however, with confidence of Stop loss strapped around u, u will one day master the swimming...
When a stock has given u a big run up and u don't know when to sell, when on one side u dont want to miss out more profit, if any, and on the other hand are also afraid to lose the huge profit already earned, use 'trailing stop loss' which is a percentage of the value and not a fixed value. a trailing stop loss keeps on shifting up as the stock moves up, thus locking in the incremental profit.
A stop loss allows decision making to be free from any emotional influences.
You can think of Stop Loss as a free insurance policy.
Investors may avoid stop loss if they are DAMN sure about what they are doing. But I still think Stop loss would be a good idea even for them. Everyone knows Rakesh Jhunjhunwala has been holding Praj Industries since it was above 200. He is an investor in Praj. It would have been wise had he sold Praj on a stop loss and reentered at 50!!! Ofcourse, u miss out on dividend and income tax exemption (all more than 1 year holdings are exmpted under long term capital gains tax rulings, i think). but still u wouldn't have to pay 300% profit (which praj would give when it again touches 200 from a low of 50?). Stop loss for investors is, no doubt wider than those for swing traders or day traders. Secondly, swing traders must have a stop loss too. strings of swings can get broken...
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