Insights

“Tight Stop-Loss” & Stop-Loss on Closing Basis: Give Me a Break!

June 19, 2012 . FundsIndia Desk

It is quite common to see trading calls where the recommendation is to buy/sell with a tight stop-loss.

I just don’t understand what is one supposed to do with such a recommendation and feel sorry for the ones who receive and act on these calls.

Tight stop-loss is such a loose term that it could vary from one person to another. Stop-loss should be determined on a logical basis and there should be a technical rationale for arriving at stop-loss level. If you cannot determine a logical stop-loss you are better off avoiding the trade.

Consider this: If you don’t know where your stop-loss is, how does one calculate the risk-reward in the trade and more importantly, how do you decide if at all you should take the trade or not.

Along with the “Tight-Stop loss” issue, the other issue is relating to calls with a stop-loss on closing basis. I fail to comprehend why someone should have a stop loss on a closing basis. This type of a trading call may be useful to amateur traders who are in the market for excitement and fun, not serious about making money.

The ones who are serious about trading and deal in position size of some consequence would realise that it makes little sense to have a stop-loss on a closing basis. Amidst heightened volaitlity you can imagine the kind of stress a trader has to encounter if the stop loss is on a closing basis.

Imagine this scenario..What if the price trades below the stop-loss level for the best part of the day and you are holding on with a stop on closing basis and price cracks sharply at 3.15 PM or just ahead of market closing. It basically defeats the purpose of having a stop-loss.

If you trade huge position in the cash segment or dealing with derivatives, it does not make sense to have a stop-loss on a closing basis, PERIOD.

The stop on closing basis is mostly adopted by traders who fret about the sceanrio where the stop-loss is hit and price resumes its move in the aniticipated direction. In such a case,  you can always find another entry, with an acceptable stop and risk-reward to re-enter.

If not, there are hundreds of other instruments and the next profitable trade is always round the corner.

Trade safe and don’t get hurt.

Cheers

B.Krishnakumar

 

 

 

 

 

Get FundsIndia’s articles delivered straight to your inbox!

Enter your email address to get:

  • Mutual fund recommendations from experts
  • Buy, hold or sell calls for stocks
  • Investment tips and tricks
  • All the latest news from Fundsindia.com

[jetpack_subscription_form]

sek