Saturday, December 18, 2010

More on Stops

A sensible discussion on the application of stops has started, and, I hope it continues.

Gaps

Piyush asks: "suppose you close the day at 5890, and so your stop does not get triggered, but the next day you come and see the market opening at 5800. now what?? shall i ait for the pullback to fill the gap or close my position immediately or wait for 15 or so minutes to see if the market is sliding or has any chances of reversal"

My Notes: Gaps are a problem for all traders. Sometimes, we have a gap open in our favor. Great. But, often, the market will open significantly against our position, thus triggering our stop. Then, the trader is faced with a decision: wait for the close or manage the trade now?

If I am long, for example, then the market opens below my stop loss, I first examine if the basis of my trade has changed. If it has, then I have to exit, the only question is how to exit. Usually, the 15 minute rule works well. I will exit if the 15 minute low is broken. If this low holds, then often, I get a better price on some intra day rally. But, I do not spend much time on managing the exit. I know, the trade needs to be closed.
In the context of the Nifty, 61.8% retracement of the previous upswing comes at 5832. Any open below this number tells me that the market may be changing direction, so the basis of the trade has probably changed.

But, we know that markets do not oblige us. What happens if the stop is at 5890, and, the Nifty opens at 5860? Now, the basis has not changed, but there is a lot of pain. There is no single answer to this situation. I usually bite the bullet and go with my 'evaluate at close' principle. If the trade is on EOD, then keep it on EOD.

I will answer the other questions over this holiday weekend. Cheers.

3 comments:

gourv said...

Hello Sir,

Gourav here.By doing EOD its easy to place stop by watching the market towards close but How about entering a trade.suppose for example i want to initiate a long if NIfty crosses 5960 .Lets say Nifty opens above that .SO should a EOD trader take Entry in the open wait for 15 mins breakou or wait till closing.If say mrket then closes @ 6020 then if one is entering her SL will be quite far as compared to what it would have been if she has taken in the morning.Lets take the 2nd scnerio market opens above 5960 then @ close closes @5860.if she has taken a trade its a trap.Hope u get the time to answer my question.

Regards
Gourav

NITIN DAMLE said...

Sir,
If some one is trading on EOD charts, I think he should not look at intraday movements except for some uncommon big events. I think he should take position at open after watching market for 15-20 minutes & must look at 3.20P.M. for last 10 minutes to see EOD levels.
Please do not apply EOD stops in intraday. You might see these levels crossed many times in a day.
Nitin Damle

DA said...

Experts, I am holding 5700/5800/5900 put at very high price. What should I do now. Please comment.

Regards
DA