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The Power of Trailing Stop Loss

While our earlier article discusses the curse of the stop loss, and encourages you to think before entering a trade rather than worrying about stopping your losses after you have entered into a losing position, today we will discuss how you can save your profits getting wiped out by putting what is popularly known as a “trailing stop loss order”.

Let us see this using an example.

Say you have a stock in mind, or say you picked up some scrip of our positional calls, and that scrip is currently quoting at a price of Rs. 100. Let us assume that you have a target of 110 in mind, at which level you would want to book your profits and exit from that scrip. You would ideally want that scrip to skyrocket to 110 immediately after you buy it at 100, but that rarely happens. Now let us say that this scrip does start to advance from the levels of 100 (your entry point) and rises up to 104 where it starts getting some selling pressure and slowly starts dropping.

At this stage, you might want to protect your virtual profit from being wiped out.

So you put a stop loss of 102, and eagerly wait to see whether it actually drops to that level of 102.

At 103, it again gets buying support and starts rising. It now rises to 106, and what was a resistance at 104, now becomes a support. So you move your stop loss to just below 104 say 103.5

Look at what happened. What earlier was a 2% assured profit, now has become 3.5%

Again, it finds buyers at 104 and rises to 107, and you are now free to move your stop loss to 106, taking your assured profit to 6%. Once above 107, you are sure it will hit 110, which was your original target, and you could then remove your stop loss order and put a limit order of 110 instead, and once that gets executed, you can take home your entire profit.

It might take a while and some keen practice before you can judge for yourself what the appropriate stop loss levels are and what is the correct time to place and move your trailing stops, but once perfected, this technique will not only save your profits, but multiply them. Yes, we mean multiply your profits. Because, if you get stopped out because of the minor volatility in the stock’s prices, not only you have booked a minor profit, but since your original target has not yet been met, you get a chance again to enter in that scrip at a price lower than your recent exit and yet some distance away from your target.

This way, instead of doing just one trade, and making 10%, you can make, let us say 3 trades, with the same initial capital, and come out with 12% with an average of 4% in each of these trades. And if you don’t get stopped out, you still make that 10% profit as per your original target.

This is how you can effectively use trailing stop losses and make money out of the market volatility. But remember; only practice will make you perfect to reap the rewards of the trailing stop loss technique.

Having said that, it would not be out of place to remind you that picking a stock that will yield you profits is the primary key to success of this technique. Also important is your belief in your stock pick and the targets. Without these, there is no point in entering the trade at all.

We, at www.itrade4profit.in do all the necessary analysis of “The trading sentiment” and “The counter activity index”, before making any recommendation as a “Positional Call”. These positional calls make it easy for you to pick the right stocks at the right time. Using the trailing stop loss technique, along with these positional calls has been a sure way to many successful trades in the Indian stock markets. No reason why they should not work the same miracles with you too.

In the next article, we will see how we can snowball profits enormously from our trades. Till then,

Happy Trading !!!