May 1, 2010


We receive a lot of emails questions regarding stoploss. It is a universal fact of trading that stoploss are compulsory and they command a significant weight age in your overall trading strategy. It is an almost compulsory ingredient in the trading recipe.
Why put a stoploss to any trade?
  1.  To keep moving in your trading activity.
  2. To keep trading stocks turning into investment stocks.
  3. To limit your loss per trade.
  4. To make sure you are able to go to market next day.
  5. To remain devoid of loss-aversion bias.
  6. To experience the real joy of getting a profit at target.
  7. To develop confidence. And By Swear, confidence and courage is developed taking a loss. Only profits makes a trader arrogant, and overconfident.
  8. To make sure you give least fee to learn in the market.
  9. It is called a ‘stoploss’ because it is meant to ‘stop’ loss. Won’t you want to ‘stop’ loss or ‘continue’ loss?
  10. Many fear from stoploss. Many don’t keep one even if given. Such traders are bound to LOSE and be expelled from market sooner or later.
  11. Many times markets and prices Spike. This Spike can kill a trader. It can wipe you out and throw you away of market. Stoploss limits are most useful at such instances when even a trader sitting in front of screen cannot execute a trade at his desired price. In trading Black swan events happen frequently. If we have accustomed ourselves to see an XYZ stock rise or fall within 2% range daily, we tend to believe it to be its skintight range forgetting that it could spike 10-20 %up or down any time. This type of bias also keeps one from putting a stoploss limit. They think ‘they know the price-range’.
  12. The rule is simple. ‘Continue’ the profit, ‘Stop’ the loss.
Later on we will go into some Specific Points such as,
1.    How to put a primary SL?
2.    How to put a trailing SL?
3.    What should be the ratio of SL limit to TGT limits.
4.    How much profit to book at 1 st TGT?
5.    How much profit to book at 2 nd TGT?
There is also another interesting debate regarding “Keeping stoploss limit in investments.” I am doing my homework and trying to find references, and experimenting practical and putting in place empirical studies to try to figure out the ‘SL for investors’ thing.