hi all.
IMHO, i have observed hundreds of technical traders worrying about finding the strategy to help them enter a position perfectly and they rather give more importance to putting zillion of indicators on the charts.
what i discovered is
TRADING = 50% PSCYCHOLOGY + 30 % RISK/MONEY MNGMNT + 20 % T.A
i have become strong believer in EXITS though i understand ENTRY helps in timing .. blah .. blah..but hey CAN YOU TIME THE MARKETS ?
anyways, i would like people to stick with discussion & not go haywire.
i would like to ascertain SWING trader's opinion on EXITS WHICH ARE PRE-DETERMINED. how much percentage of price or where would you keep your 'traling stop loss' every day ?
so, i want to ask all traders who feel they are consistent in theit trading, do you consider keeping a ' protective stop loss ' to EXIT a trade & if yes, how much ?
by protective stop loss, i would mean a traling stop loss and if i am wrong in thinking they are both same, please enlighten me.
regards.
Hi Rishi,
A stoploss is meant to protect your position either by limiting the loss or ensuring a certain amount of profit already made. This way it is always a protective stoploss.
Taking your definition/meaning of 'protective stoploss', it means, exit after acertain amount of profit is made, irrespective of whether there is still enough potential for higher profit. That is, you will exit at a particular level.
Whatever method you use to exit, it has to be related to your entry. The method/strategy you adopt for entering a trade, you should follow the same strategy/method to exit. Even if you enter based on recommendation of a broker or your friend, the exit also should come from the same source. If your broker/friend recommends a trade, ask him when to exit.
If you are using a strategy of your own or something based on some indicators or chart patterns, use the same strategy to exit. The strategy has to have a stoploss/exit method built into it. Follow it.
One strategy I read about is like this:
Assuming you put 50000 in a stock, and you are in profit of 5000 (the value of your holdings becomes 55000), sell a portion the stock such that you get 5000 back in cash and value of your holdings goes back to 50000. Similarly, When the value of your holdings fall by 5000 (The total value becomes 45000) buy more of the stock for an amount of 5000 such that the value of your holdings becomes 50000 again. The point I am trying to show is the entry and exit are based on same concept of adjusting the value of holdings in steps of 5000. Enter with 5000, exit with 5000 (10% every time) to balance your position. The amount you took out has to be re-invested in another counter to make it earn further profits. I don't know how much this strategy gives you total profit in long run.
Coming back to strategies based on some indicators or charts, there will be a stoploss built into the system. Some times it may so happen that the stoploss remains at a much lower level compared to current price and if you wait to exit when the stoploss is hit then the profit will be reduced. In order to counter such a case, you can define an emergency exit level. For my trades I define this emergency exit as second lower low from the current bar when I am long and for shorts it is second higher high from the current bar. However, in case of unusually low or high occurring, (like the ones happen due to somebody by placing an order by 'mistake' at a price much away from current price) I ignore that bar and consider next available reasonable bar.
Although there are many methods/books describing how to place a stoploss, it is the individuals comfort level which should be followed. By looking at the previous trades you have taken you will most of the time feel that you should have exited at some other point. Comparing the actual exit points with what should have been the correct exit, you can reason out why the other exit was correct. Once you start analysing your trades and reason out your success/failure you will naturally find your comfort level where you will not regret the exits. Then stick to that comfort level stoploss.
-Anant
