Ride your stocks for monster gains by doing this.
The 3 simplest strategies to trail your STOPLOSS.
Dear Aspiring Peak Trader (Yes, that’s who you are).
Today I am going to talk to you about the biggest dilemma you will ever face (or have faced) as a beginner trying to make it big: when to exit a stock?
When to exit the stock?
Have you ever entered a trade at the perfect entry point and got out with a meagre 10% profit, only to see the stock rip through 50% within 2 weeks after your exit?
Or, did you hold through the position post the 10% gain, only to see it make a U-turn and evaporate all your precious gains?
As a beginner, I would mostly oscillate between these two extremes. Like hell man, it was either the former or the latter, nothing in between. Naturally, I was frustrated, doubted myself and sometimes blamed the market (LOL, this one is stupid).
But why does this happen?
Why cannot you hold on to a bigger gain despite making a killer entry?
Why do you give back whatever meaningful gains we have made in such a tough market?
The answer i am afraid is YOU. You are responsible for this shit. Because you, are only human. You have GREED and FEAR in abundance (these emotions are necessary but just like extra food causes obesity, these emotions in excess are lethal). It’s your fear of losing that makes you sell your position at a meagre 10% and your greed that makes you hold for more than 10% the stock which is reversing. But we will never be able to get rid of our emotions, will we? Never!
What do you do then?
It’s simple actually. You need to save you from yourself. And you do this by laying down some RULES.
Yes RULES. Without it, humanity would self destruct.
Here are 5 rules which I follow to hold my positions for a maximum gain:
I tricked you. There ain’t 5 but just 1: Trailing STOPLOSS.
THE TRAILING STOPLOSS:
Remember the 4 quadrant framework of risk management. The 1st aim is to not lose big. This you achieve by using a STOPLOSS as soon as you place your trade.
The next aim is to loss small or win small. And you do this by selling some portion of the trade into strength(again there are various rules you can make for yourself to do this). And the 4th is to hold whatever position is left for a HUGE gain.
You do this only by holding the position for a longer period of time while also protecting your gains (well some portion of it alteast ) by shifting the STOPLOSS from the original place upwards as the price makes new high. This shifting of the STOPLOSS is best done by a rule based trailing (TRAILING verb ~ draw or being drawn along behind someone or something) below a key variable (eg. Key moving average, Supertrend etc) and hence the technique is called the trailing STOPLOSS.
Here are 3 key variables which can be used to trail your STOPLOSS:
The swing low:
A trend will cease to exist if the price breaks below a previous swing low (Dow theory) and therefore an SL 1-0.5% below this is an excellent way to trail your SL. It will keep you in the trend for as long as the trend persists. This also works well in all timeframes.
The Supertrend:
The supertrend is a trend following indicator which takes into account the volatility of the stock as well. It has 2 components: the length/period (default of 10 in TradingView) and a multiplier (default of 3). When the stock is on an uptrend the supertrend is below the price; and on a downtrend it is above the price. An SL 1-0.5% below the ATR will therefore keep you in the stock as long as the uptrend is intact ( the closer the SL is, the higher is the chance that it will be triggered in an event of a shakeout).
Key Moving average:
Key moving averages like 10 SMA, 21 EMA, 50 SMA and the 200SMA (or any other MA which the price has been respectful of during the uptrend can also be used) can be another excellent variable to trail your SL behind. The choice of the MA will depend on your style and preferred timeframe. Short term traders would find 10/21 working best while positional and Long term investors would find 50/200 better.
I have used a combination of all of the above 3 in the past and continue to do so. You should study them for yourself to see which ones works best for you (as you know trading styles are very personal).
Let’s look at an example now in case of Laurus Labs.
Image 1 below shows how using Supertrend as a Trailing SL would have helped you to capture a bulk of the 600% monster move.
Image 2 shows how a trailing SL below the swing lows would have also helped you capture a similar 500% move. Note that using the 200 DMA signal would have also given an exit shortly after and allowed you to capture a bulk of those gains.
Image 1:
Image 2:
Conclusion:
Use trailing STOPLOSS to ride your stock for a bigger gain (while protecting your profits).
3 variables which are excellent to trail your STOPLOSS are:
The Swing low.
The Supertrend (10,3), and
A key Moving average.
That’s all for this weekend.
Please subscribe to the newsletter if you liked the article and also share it with your market-enthusiastic friends and family.
And follow me on Twitter for some more learning and some hot takes.