This is where and how you should put your Stoploss

An ideal stoploss should save you from a big loss and also never get triggered

Jul 27, 2024

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“Risk means the chance of being wrong -- not always in an adverse direction, but always in a direction different from what we expected.”
Peter Bernstein

And so every trade you initiate will have a risk.

You cannot measure and quantify it.

But you can manage it.

How?

By having a Stoploss order.

You can decide the amount you are willing to lose if the trade goes against you get out at that point.

In this article, I will show you how you should determine that point.

(PS: I will also share the best way to avoid getting your SL hit. Please read the full article till the end)

An ideal stoploss should take into account the following variables:

Your stoploss should be below the price point below which your trade/setup thesis is invalid:
Most of the time a technical setup involves a structural pivot, below which the setup fails. For example, if you are trading a pullback from a 21-ema, the setup will fail if the price breaks below the 21-ema convincingly.
A base breakout will fail if the price comes back inside the base and closes below the breakout candle (or low of the base).
In these cases, your Stoploss should be below these structural pivots.
Choice of pivots is in turn determined by the timeframe of your setup/trade:
Say you are trading a Big Base breakout from a tight area as a swing trade. It is best to use a small stoploss that is just below the tight area or the breakout candle.
Whereas if you are trading the setup as a positional trade and want to capture a longer move (and therefore you would want to give enough time for the stock to prove itself before jumping ship) then the swing low would be a better pivot.
Your stoploss should factor in the stock’s inherent volatility (in your trading timeframe).
A stock’s volatility is an inherent characteristic of the stock. Generally, large caps are less volatile while small and microcaps are more. If your stoploss is less than 1-ATR (a measure of volatility) which is very tight, the probability of the stoploss hitting becomes higher just by the stock’s natural tendency to move by that much at random.
Your stoploss should be in line with your risk appetite.
We all have different risk appetites. Our max loss limit beyond which the pain of loss becomes insufferable is different.
You have to make sure that given your trade timeframe, whichever stoploss you choose; the loss should not be larger than the max loss limit.

Hence, stoploss is a function of 1) Max loss and 2) Setup (setup gives you the structural pivot).

All you have to make sure is this:

No. of shares * (buy price - Stoploss price) =< Max loss (max pain point).

Let’s look at an example:

TVS motor had a peak breakout entry today.

Let’s say your account size is 10,00,000 INR.

Max risk per trade is 1% of account size i.e. 10,000 INR.

Now there are 3 valid pivots for an entry made today at day close @ 2510.

Below the intraday pivot low (see image 2).
Below the Inside bar low.
Below the swing low (low of second T).

These 3 entries will give you an SL of 1%, 4%, and 6% approximately.

Depending on which pivot you are using, you can size your trade differently and have the same risk of 1% (10,000 INR).

1% SL 100% size. (no of shares = 500, Buy price = 2510, SL = 2490) Total risk = 10K INR
4% SL 25% size. (no of shares = 100, Buy price = 2510, SL = 2410) Total risk = 10K INR
6% SL 15% size. (no of shares = 62, Buy price = 2510, SL = 2350) Total risk = 10K INR

1 & 2 are suited for short-term and swing trading where you catch a small move and rotate your capital quicker, while the 3rd style will suit positional trading where you can play more positions and hold them for longer for a bigger move.

Thank you for reading The Technical Take. Please share it if you find this valuable. Thanks

Ideal Stoploss that will never hit:

Well, an ideal stop loss doesn’t exist.

So stop looking for one.

Be prepared to take a loss when the trade goes against you.

The only way to escape hitting the stoploss is to NOT have one.

That’s all for today.

There are different ways to achieve the same thing via trading i.e. outperform the markets and create wealth.

But there is only one way that suits you the best.

The onus is on you to find out which is that and create a trading system that is personal to you.

Trading System Masterclass for Beginners

Sakatas Homma

July 11, 2024

Trading System Masterclass for Beginners

The Annual Sakatas Homma’s Beginners Trading Masterclass is finally here. This year it will be all about the trading system. Your unique trading system. Excited! would be an understatement. Details Below.

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