August 15, 2014

Question: trading with smaller stoplosses

Question: Sir. I want to put small StopLoss instead of 10% or as u mentioned above in Daily timeframe. Any suggestion ?



A rough or indicative stoploss should ideally take into account the average trading range of a stock. On daily timeframe, this is usually in the region of 8-10% and can increase to 15-20% in case of stocks with more volatility. This range can be determined using the ATR function in Amibroker.

Ideally you would want to have a stoploss which does not get triggered too often but only occasionally.

Now if you keep a stoploss smaller than say 10%, chances are high that it will get triggered. This is because it is normal for a stock to do some timepass, meander or trade in a range for sometime and then move on.

RCOM chart with 10% SL

Another way to keep smaller stoplosses is to use hourly charts instead of daily charts. Here the average trading range can drop from 10% to say 3-5%.

Note that the smaller timeframe will always lead to more trades and whipsaws.

Irrespective of the time frame you are trading, the best stoploss is the recent levels of support. Your SL should be immediately below this level. Now the SL by this method can vary from 10 to 20-40% depending on where the support is.

But a deeper SL should not bother traders. If  you are following position sizing rules, then you need not be worried whether the stoploss is 10% or 20% or 30%. If your SL gets hit, the loss in Re terms is the same.

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