Do you find yourself getting stopped out often in your trades? Worst thing is, most of these trades stop you out and then go in your original trade direction. Have you faced this?
This one stop loss mistake beginners do can save you thousands and even lakhs of rupees for you.
This one stop loss mistake beginners do can save you thousands and even lakhs of rupees for you.
So, what you must be doing is setting your stop loss based on how much money you are willing to lose. So, if NIFTY atm option is at 100 rupees today, and you have only 10k rupees and you can afford to lose only 500 rupees, you buy 1 lot option, and you set SL at 94.
You find that the market came down from your entry price 100, hit 93.80, and then went upto 170. You didn't enter again fearing loss. So you missed 70 points. What happened here?
You decided you'd be willing to lose only 500 rupees per lot. You had money for only one lot. So, you placed the SL at 94. Do this and you'll get stopped out enough number of times to frustrate you and make you stop trading.
You are approaching stop loss placement upside down.
You are approaching stop loss placement upside down.
First understand what a stop loss is. A stop loss is set at a place where the market price signals to you that your trade thesis has failed and it is no longer valid.
Let's say you trade pivot high low breakouts, you entered nifty at 100 (prior pivot high breakout).
Let's say you trade pivot high low breakouts, you entered nifty at 100 (prior pivot high breakout).
Prior pivot low is at 88. This means, if 88 is broken clean, market is signaling your trade has failed. So where do you set your stop loss? In this scenario, 1 or 2 rupees below 88 (trying to avoid the SL hunting). But what did you do? You placed your SL at 94.
So, if you had 10k and you can only lose 500 rupees, take only those trades where you had an actual stop loss point which would lead to 500 rupees loss in the worst case of getting stopped out. Otherwise increase your capital.
When you trade multiple lots, many people say risk only 1-2% of your capital on any single trade. So if your capital is 1 crore, you can risk 2 lakhs maximum. Say you're going with 2%, you can't say like "I'll risk 2 lakhs. I'll set a 5 point stop loss, I'll buy 533 lots".
If market is at 100, trade failure signaling region is 88, set your stop loss at 87. So, at 13 point stop loss, what must be your position size? 2,00,000/(13*75) = approximately 205 lots.
SL placement is a very simple thing to do. It depends on the system you trade, and the point where your trade must have failed. This also should be backtested as part of the system and not be an arbitrary number.
If the loss amount per lot in worst case scares you, you either don't have enough capital, or you haven't tested your system thoroughly enough, or you're viewing from a single trade perspective. Either of these being present will need fixing. Scared money will be taken away.
