Every trade you put on, you should be prepared to lose. So, make sure to place your stop-loss order.
Otherwise, what would have been a small loss turns into a big loss, throwing the entire risk/reward
ratio out of gear against you.
Where should the stop be placed? The simple answer is: where you think you can absorb the loss.
Suppose you go long and buy 500 of ABC @ 120, with your 15K budget, and you are mentally prepared
to take a loss of 1000 at this time of the day, so keep your stop loss for ABC at 118. Back
calculate to arrive at a figure you are comfortable with. Remember: the loss, if it happens,
will be going away from your 15K capital.
If the market goes in your favor once you have taken position and the stop-loss is in place, then
you need a set of rules that will allow you to exit the market profitably.
This poses a real dilemma. If you exit too soon, you will secure a small profit, but miss out on all
those big moves that occur (and the big profits that go with them). On the other hand, if you wait
too long to exit, the market may reverse and take away all of your open profits and even put you
into a loss position.
Because of this, you will absolutely need an exit strategy that is effective: forward
calculate and decide on a profit margin as explained earlier. Be realistic. Do not be influenced
by emotions like hope, fear, doubt and greed. For this trade, with respect to your profit
calculation, set yourself an initial target: you will exit ABC as soon as it reaches 122.
Setting these two targets -- STOPLOSS: sell if the price goes down to 'x' and EXIT: sell if the
price rises to 'y' is good trading method.
What this 'x' and the 'y' should be, will also
be infuenced by various things: strength
of the scrip, overall market condition, time of the day, your risk-taking apetite and how deep
your pockets are.
Setting yourself reasonable targets is no good if you do not stick to them. This is where stiff
money management comes in.
If after taking a position on ABC you see the price sliding down and down, get out! Get out as
soon as the price goes down to 'x'. Don't wait around for it to come back in your favor because
the odds are against it.
There will be cases where the price will move up but not upto 'y' — what do you do? Answer:
Take a "Mid-Point Stand".
If you see the price moving up and up, do not do anything till it reaches your target
of 'y'. At this point, you have to take a "Mid-Point Stand" on whether to sell at 'y' or hold on.
In both cases, you have to keep in mind that if things turn bad, profit already earned will turn
For all stages of both bull and bear markets, you should take a "Mid-Point Stand" when things
are going in your favour. When they are not -- simply get out at your stoploss and look
Here you need to know the overall context in which your buy/sell signals are being generated.
Taking a mid-point stand requires that you pay more than a little attention to non-technical
indicators, to make it possible to take a long enough look ahead to make your view a sound one.
For example, on the day the Manmohan Singh govt. won its trust vote in Parliament in Aug'08 all
stocks were going up and up even before the official verdict was out. On a day like that it will
be foolish to sell at 'y' if your timings were right.
A trust vote does not take place everyday, so there will be very few occasions like this where
you can take a mid-point stand with certainty.
However, there will be times in the stock market when prices changes in big chunks, very
rapidly. If you happen to be in the middle of such a
rally, and you've been able to spot it correctly, you can take a mid-point stand. In all other
cases, you simply must exit at 'y' and be happy and content with your profit.
In case prices
have not reached 'y' and have started falling, use your judgement and release with some profits
at least. Don't let the prices reach 'x'!
This is sound money management. Without following sound money management principles, there
is no chance of success in intraday trading the markets.
On certain days all stocks will look out of shape. Nothing is happening. Everything is
range-bound and moving sideways. Rises are small, insignificant and cannot sustain. This
is a day to avoid.
Stay out. Do not take a position on any scrip on that day. No place for hope, fear,
doubt or greed.
The act of staying out is just as much a positive action as buying or selling, and, in fact,
requires more courage at times.