So u thought Stop Loss will save u from disaster while you enjoy your movie. GOOD LUCK.
Stop loss orders are the favourite for most intraday traders, scalpers and also for positional traders. We are sure it is going to save us from oblivion when market melts down or up. Looks good… My risk is controlled & now off I go to watch a favourite movie
It’s not. In a normal market, Stop loss orders are just food for stop hunters lurking & waiting for right moment. When markets turn volatile SL orders go to watch movie with you.
Example: Recent volatility in PSU banks when Govt. announced recapitalisation. The volatility is probably due to short covering by FIIs. Although PSU stocks gaped up on 25 Oct, same thing happens for Intraday volatility as well.
Look at two charts below, one bid-ask chart and another one actual trades with volume and volume profile. Just look at the volume and volume profile where most trades took place even after gapping up big time.
No. I don’t want to say a word. Infer yourself why Stop loss orders ditches you when you need it most.
I recently saw a video where a learned man says that ‘one should place their entry orders where they would otherwise place their stoploss and one should place a stoploss only to cover for the worst case scenarios to prevent extreme damage.’
That’s is the whole point.
Why should we place a stop loss order @ worst case scenario which is in any case a extreme loss. It is the extreme loss that a SL should prevent.
Well, it depends on how we perceive worst case scenarios. I was referring to a scenario like this:
Say a stock like BPCL was trading at 500 levels through the first half of the trading day and you’ve taken a sell position. And some stock-specific or sector-specific news spikes the stock up by 15% in the afternoon session and the stock closes at these high levels. That’s a disaster to your account.
I would rather have a stoploss in place above say R4 levels of 4% odd above my selling rate. This would definitely prevent extreme damage, right?
In the above SBIN chart, even after gapping up big time, the stop orders placed upto 290 did not go through ( although bids started from 278). The maximum volume was at 305 where probably few but very large orders went through (see there is no movement in price or bid/ask chart at 305 @9.16 &9.17 am). So a stop loss market order probably went thro at 300+ (say) while stop limit orders (between 291-300) also went through.
In this case a trader needs to be super human to really visualise the situation and place stop limit at 291. Even then he does not save much compared to a trader who did not place stop but in anycase could have managed to liquidate around 300.
So this is what happened on 25 Oct where SBIN closed at 254 the previous day and opened at 292.60 the next day and only made a low of 290 in the first minute itself after which it went up almost another 10%. If you had a carry forward short position in SBIN futures, then i’m afraid this is a loss one has to take as this happened a day before expiry. Stoplosses don’t work in this scenario as it’s a freak move. You can only cut your losses at the earliest and maybe reverse your position in this case to make up for the loss.
If you actually think about it, the market is very benevolent if you can see what is actually happening. Although SBI went to 316, it came back to 295 levels where one could’ve cut their shorts and gone long. SBIN did go to 351 the next trading day and one could’ve made up for their entire loss. But the problem is people take further short positions when they see a dip.
Also, you have changed your name to ‘TraderVenk’ now. So much swag.
My name “venkatZerodha” looked like I was an employee of Zerodha which I am not So…
Lol. For people working at Zerodha, it probably appears as though you work for another brokerage firm and you are here to take us down, once and for all.
What happened on 25 oct in psu banks is a very very low probability scenario. Basing our trading decisions on a one off case is not prudent. Agreed that on 25 oct morning stop losses didn’t work but there will be many times when stop loss will save you from major loss.
So can the event that happened on 25th oct be termed as a black swann event??
Totally agree that losers need to be cut at the earliest. Question Should we do it on our own or place a stop loss and let system do it (that brings a kind of relief that “I followed the process and system did it”)
Agreed that experienced traders can use a mental stop loss. But the problem with beginners is, they will let losses run, and one day a sudden move could wipe out their whole account if they freeze seeing a huge loss, and are not able to cut the losing trade.