Let’s imagine this scenario. I’m using real data here.
The option premium is currently 409 rupees. I feel that the NIFTY would go down so I’ve taken a short trade at 409 rupees. I do have a strategy to take profit if the trade goes well but as well all know there is no strategy that can predict a trade 100% of the time.
What should be the stop loss here?
These are the things I’ve read from books.
I’ve read that stop loss should be 1%-3% of my trading capital. The problem that I see here is 1-3% of capital is 120 or 160 rupees if the trading capital is 4000 rupees. In trading, we need some time for price action to work so may be the price goes below 160 rupees. I’ve had times when price when -2000 and later got to 3000 rupees+. So I feel that wouldn’t work.
Or am I seeing this wrong? Should I add 1-3% in this example to the options price which is 409 rupees? So that my stop loss would be in 413.09 rupees (adding 1%), 417.18 rupees (adding 2%), 421.27 rupees (adding 3%)
I’ve been researching this topic for a long time and hence thought of asking here.
Also, some people say 1%,2%,3% stop loss is better whereas some others say 5% is better and some even say large numbers like 10%, 15% is better. What’s your experience?
I think this is a difficult question to answer and usually depends on the risk tolerance for the trade you have taken. There is no right or wrong answer - the thought process should be to not blow up the capital, and maybe then take a call on the stop loss based on your risk tolerance and conviction.
I know its a very difficult question. Before asking here, I’ve searched almost all the forums. I know my risk tolerance but if I could predict the volatility. I could have add that to the stop loss so that it wouldn’t hit stop loss every time during volatility.
I know about ATR but quite frankly, I’m just learning about it. I don’t know if I’ve to calculate the stop loss by price - 2*ATR or calculate the stop loss at 1,2,3,4, or 5% and reduce the ATR figure from it.
Wish if there was someone who could shed some light on this difficult question.
Adding to what @Pai mentioned, Till the capital is slightly higher (let’s take example of 50k here), One can keep higher % as SL due to reasons that you mentioned.
When I started trading, I used to trade with capital like 20k n after making and losing some profits, I used to blow the account eventually. this happened at least 3-4 times. But, once I started withdrawing profits to the extent of capital when I was up, things started improving drastically.
I think with smaller capital, the focus should be more on the rationale of trade with higher SL% between 10-20% rather than price fluctuation. With 5k capital, 20% SL should mean 5 trade opportunities and risk-reward should be 1:3 at least and one needs to play with slightly higher timeframe duration options (monthly preferably compared to weekly)
Thank you for your valuable idea. What I’m probably going to do is to back test a few trades(May be a months time) and note my usual entry position and see how much of a negative deviation comes for the trades from the option premium chart in percentage and find the mean or average to select a stop loss based on that. I don’t know if that’s going to work.
I did search a lot of data but I see so many confusing data. Some say 1% whereas some others say even 20%. So, I think manually testing it is the only way.
Quick question out of the blue. I know this is not related to the question in anyway but do you withdraw your profits to bank or you keep it in the trading account. I mean, I’m very confused how I should go about it. Keep 50% in bank and 50% in the account to reinvest may be?
