Thursday, August 17, 2006

Smart Trailing

In the figure, suppose you have bought 100 shares of the stock at the point shown in the diagram and add to it after the next pull back. You will see that hypothetically, you can keep riding the profits. The first stop loss is SL 1 when the stock is at level MP 1. Note that the stop loss is slightly below the last wave low. The stop loss is SL 2 when the stock is at level MP 2, SL 3 at MP 3 and so on.
In situations where the prices move up violently such as the point SL 7, shown in the figure, stop loss may be kept by following other methods such as mid points of large-bodied candlesticks, gaps and so on.If you correctly trail the position with smart stop losses, you will see that you will be able to ride the profits since the stock continues to make higher highs and higher lows. Similarly in the case of a position where you are short and the stock or futures product makes lower highs and lower lows, you can keep moving your stop loss lower and lower (but higher than the last wave’s top.)
Trailing stop loss is an art that can take a life time for many to master.
I take a position and keep a smart stop. Now I want to trail. There is a scare early that probably makes a peep at marked to market loss. If I'm right (which is not that big a deal for any self-respecting analyst) then I should be well on my way to break even and profits. This is natural.

Now how do you know when to exit ? This is a tricky question for many, especially for those who do ultra-short term trading, scalping, jobbing, whatever the name.
Do I book my profit a couple of points after my "target profit?"
No, say experts, trail till your last breath :)
The best way to deal with, in my experience is, once you have reached a level of good profits, (that can come handy in loss making up for loss making trades) start tightening the stop. But never loosen your grip. If your stop is reached, make an exit. If there is a jump and your stop loss level is exceeded, exit at whatever best price you get.
I for one, never keep a stop loss. Its always mental (Warning: This is only for experienced traders, beginners must always keep real system stop losses.)
But there is some skill required when you keep a mental stop loss, because the mind starts playing games. So observe your behavior carefully. Note down every step, discuss with an expert and then come to a conclusion on what works best for you.

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