Power of Trailing Stop Loss
While our earlier
article discusses the curse of
the stop loss, and encourages you to think before entering a
trade rather than worrying about stopping your losses after you
have entered into a losing position, today we will discuss how you
can save your profits getting wiped out by putting what is popularly
known as a “trailing stop loss order”.
Let us see this using
Say you have a stock
in mind, or say you picked up some scrip of our positional calls,
and that scrip is currently quoting at a price of Rs. 100. Let us
assume that you have a target of 110 in mind, at which level you
would want to book your profits and exit from that scrip. You would
ideally want that scrip to skyrocket to 110 immediately after you
buy it at 100, but that rarely happens. Now let us say that this
scrip does start to advance from the levels of 100 (your entry point)
and rises up to 104 where it starts getting some selling pressure
and slowly starts dropping.
At this stage, you might
want to protect your virtual profit from being wiped out.
So you put a stop loss
of 102, and eagerly wait to see whether it actually drops to that
level of 102.
At 103, it again gets
buying support and starts rising. It now rises to 106, and what
was a resistance at 104, now becomes a support. So you move your
stop loss to just below 104 say 103.5
Look at what happened.
What earlier was a 2% assured profit, now has become 3.5%
Again, it finds buyers
at 104 and rises to 107, and you are now free to move your stop
loss to 106, taking your assured profit to 6%. Once above 107, you
are sure it will hit 110, which was your original target, and you
could then remove your stop loss order and put a limit order of
110 instead, and once that gets executed, you can take home your
It might take a while
and some keen practice before you can judge for yourself what the
appropriate stop loss levels are and what is the correct time to
place and move your trailing stops, but once perfected, this technique
will not only save your profits, but multiply them. Yes, we mean
multiply your profits. Because, if you get stopped out because of
the minor volatility in the stock’s prices, not only you have
booked a minor profit, but since your original target has not yet
been met, you get a chance again to enter in that scrip at a price
lower than your recent exit and yet some distance away from your
This way, instead of
doing just one trade, and making 10%, you can make, let us say 3
trades, with the same initial capital, and come out with 12% with
an average of 4% in each of these trades. And if you don’t
get stopped out, you still make that 10% profit as per your original
This is how you can effectively
use trailing stop losses and make money out of the market volatility.
But remember; only practice will make you perfect to reap the rewards
of the trailing stop loss technique.
Having said that, it
would not be out of place to remind you that picking a stock that
will yield you profits is the primary key to success of this technique.
Also important is your belief in your stock pick and the targets.
Without these, there is no point in entering the trade at all.
We, at www.itrade4profit.in
do all the necessary analysis of “The trading sentiment”
and “The counter activity index”, before making any
recommendation as a “Positional Call”. These positional
calls make it easy for you to pick the right stocks at the right
time. Using the trailing stop loss technique, along with these positional
calls has been a sure way to many successful trades in the Indian
stock markets. No reason why they should not work the same miracles
with you too.
In the next article,
we will see how we can snowball profits enormously from our trades.
Happy Trading !!!