A Traders Best Friend

Apurva Sheth
Today I want to introduce you to your best friend. Don't be perplexed, you have read it correctly. Yes, I will introduce you to 'your' best friend. Most of you know him but somehow you have lost contact with him.

But before I introduce him to you, I want to tell you what I think a best friend is. I am sure you will have your own version to define who is a best friend but apart from that I also want to tell you what a best friend does for you.

A best friend is someone with whom you share a special bond almost like a brother or sister, sometimes even more than that. He is someone whom you can trust. He is someone who not only 'hears' your problems but will 'listen' too.

I am sure you will be having friends whom you can rely upon. There are lot of advantages of having friends. Apart from helping you when you are in trouble they also help you know yourself better. They will give you a reality check by telling the truth when you need it the most. Apart from all this there is also a health advantage. Friends help you reduce stress at all levels - Physical, Mental & Emotional.

I am sure as a trader you would also like to have a friend whom you can rely upon while trading, after all there are so many advantages of having a friend isn't it?

Contrary to what you may be thinking, a trader's best friend is not an individual but a tool. And that tool is 'STOPLOSS'.

You knew about this guy, didn't you? But I will still go ahead and formally introduce him, just to break the ice.

A stoploss is a tool that a trader uses to limit his losses. (Now why would you not be friends with someone who will help you limit your loss, right? )

A stoploss is a level at which a trader accepts that the initial trade that he took is not in his favour anymore. He then decides to square-off his initial position by entering an opposite position. This simply means that he sells if he had bought initially and buys if he had sold initially.

A trader can use this tool by entering a stoploss order with his broker. A stoploss order allows a trader to place an order which gets activated only when the market price of the security crosses a threshold price. This threshold price is specified by the trader. Most trading platforms denote it as a stoploss trigger price.

Along with the stoploss trigger price a trader also has to specify a 'limit price'. This is the price at which his position should be squared-off and executed.

I have illustrated a diagram below to make it simple and easy to understand the mechanism of a stoploss order. This example talks about how to place a stoploss order after you have bought a security which is what we do at Swing Trader. We buy the share first and then place a stoploss order to protect ourselves from downside risk.

Understanding stoploss mechanism after you have bought a security
Source: Profit Hunter

As you see there are three elements in the above diagram. The obvious one is the current market price which is the rate at which the stock is trading currently. The stoploss trigger price is the threshold price while the limit price is the rate which the stock will be sold.

Now let's understand this thoroughly with an example. Suppose you have bought a stock at Rs 100. Let's say it is currently trading at the same level and your stoploss for this trade is Rs 92.

Now you want to place a stoploss order.

You will have to enter a stoploss trigger price and a limit price. The question is what should be your stoploss trigger price and what should be your limit price. Simply speaking your stoploss trigger price should be higher than or equal to your limit price.

You can place a stoploss trigger price at Rs 92.10 and limit price as Rs 92. This means that if and only if the stock trades at a level of Rs 92.10 your stoploss order will become live. So as soon as the stock trades at 92.10 your order will be sent to the exchange to sell the shares at Rs 92.

On the other hand you may want that the stock to trade at a level of Rs 92 to get your stop triggered. In that case you can keep a stoploss trigger price of Rs 92 and a limit price of Rs 91.90. You can also keep the stoploss trigger price and limit price both at Rs 92. But it's preferable to keep a slightly higher stoploss trigger price so that your order gets filled immediately as soon as the level is triggered.

Placing and using a stoploss while trading is very helpful for a trader. It is as good as having a best friend watching you over when you are at risk.

Most people think that prime objective of trading securities is making profits. To attain this objective they take reckless decisions and risk more than they can afford to lose. Sooner or later such people are bound to fail if they don't manage their risk well.

Stoploss is a tool that allows traders to manage their risk by accepting losses when they are small. Most of the times traders avoid using a stoploss. They consider it as an unwanted guest rather than a dear friend.

Having a stoploss in place is like having a reality check from a friend when you need it the most. A stoploss ensures that you do not risk more than you had initially thought of.

A stoploss enables a trader to accept his mistake when it is small. All big losses start with small losses. By avoiding a stoploss one only allows his mistake to grow bigger and worse.

Keeping a stoploss also reduces stress at all levels - Physical, Mental & Emotional. Trading requires lot of energy on all the three levels. Probably more on the emotional side than on the physical side. But you don't want to burn yourself out early by thinking about the positions that you might be carrying all the time.

After knowing all the advantages of stoploss what will you decide - extend a hand of friendship or remain aloof? I have made my choice. What about you?

Do you see stoploss as your friend or an unwanted guest? Share your views in the Club or share your comments here.

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27 Responses to "A Traders Best Friend"
Sudhir Mahale
14 Nov, 2017
For which products I should apply stop loss? The article is very clear that it is for any trade. However your colleague Mr. Faiyaz Shaikh told me that it is to be used for Mr. Apurva Seth's products like swing trader only. Other products like Hidden treasure or stock select are for long term and hence stop loss should not be used for these trades. Like 
Khazan
10 Nov, 2017
The given example does not gel well with the software plateform I am using. There "limit price" is the price where I wish to sell. Hence, it has to be more than CMP. If it is less than CMP as illustrated in your example, the stock would get sold immediately at the CMP. Suppose, I bought the stock at Rs. 100. If I place an sell order with "limit price" at 92 and stop loss trigger price at 92.10 as you have illustrated, then the stock will get sold immediately at whatever price (higher than 92) it is trading at the point of placing my order. If the CMP at that point is 98, it will get sold at 98 putting me in loss since I had bought it at 100. Stop loss proves not to be my friend in this scenerio. Please clarify. Like 
S K Damani
25 May, 2017
Nice explanation of the "Best friend". Not putting a stop loss to your trade is almost like doing Harakiri. If you wish to survive long in the market and make lots of monies in the next rally, you have to first save your capital,you have to trade with your best friend, right behind you. After your stop loss, clicks, every possibility of the stock moving up, but there again you can take a new trade and ride the up move again !!!!!!Like 
K.G. Rao
02 Mar, 2016
Why, oh why, does our mkt software not hv provision for buy/sell orders and stop loss orders to be carried over till cancelled? And, stop loss orders, at least in our Indian software environment, sometimes dont work. I hv had experiences when the drop was so fast the stoploss simply did not take effect. This was abt 10 yrs ago, but unless our software has improved since then, the same cld happen again today.Like (1)
Deepak Sharma
05 Dec, 2015
Please write this type of Strategy in Hindi language also So that more people can read about this Like 
JOHNSON
10 Aug, 2015
Thanks for your explanation .It had helped me to identify my real best friend Mr".Stop Loss".Like 
Anil Bedi
06 Jun, 2015
thanks for explaining the importance of Stoploss & relating it to a best friend.Like 
Swaminathan
20 Mar, 2015
Not clear. Uses lot of jargons. It does not answer when and how the need to stop loss arises in the mind of a investor. To my mind trader is different from investor. This is meant for traders who in my view are like or gamblers. By the minute they buy and sell . I thought this site is for investors. Swaminathan Like (2)
Makarand Wable
15 Mar, 2015
I completely agree with Sameer. I request Apurva to provide logical sequence of steps to be followed for his own live recommendations: both buy order and StopLoss sell order. Thanks.Like 
JAINVIRENKUMAR
15 Mar, 2015
stoploss is good for traders./.With stoplos you booked loss. I purchase the Stock Rs.100.00 and put stoploss 92.00 . The same day it goes down to 94.00 and after three four days it come down to 90.loss booked.and fifth day it is up to 95 and seventh day it goes up to 105. In such cases what should be done and how to recover the losses.Like (1)
Shiv
15 Mar, 2015
You are my good friend. My wife lost heavily ignoring stop loss advise.A pragmatic trader need to strictly follow your advise for stop loss. Next question is how to workout stop for a trade for buy or for short? Pl guide.Like 
Jaydeep Nanda
15 Mar, 2015
helloo ... Indeed it is a good discipline, but how do u make a stop loss ?Like 
VIVEK
13 Mar, 2015
Good guide. How do I do this stop loss? First, I purchase stock A. Next, I add sale order for A? Right? Can you post step-by-step guide for ICICI direct for say stock called XYZ LTD? Like 
dharmessh
12 Mar, 2015
It's absolutely correct to use stop loss tool in trading. I think Asssd is not using it.Like 
Ajit Chaudhury
12 Mar, 2015
Very well defined in simple terms. But could you please explain how to place a STOP LOSS in case of short sell. Thanks for your help.Like 
RK Jha.
12 Mar, 2015
Thanks for elucidating the importance of SL and SL Trigger price.I was aware of the terms but could not ever use it.Though it was explained in books and conversations a few times but NOT this way.Thanks for the input.Like 
Sameer
12 Mar, 2015
I think there is something wrong in the example given. If I have bought a stock at Rs 100, and I want to sell it with profit which is expected to be 15% ie Rs 115. In this case if I have to place an limit order with stop loss the my limit would be Rs 115 and my stop loss would be 92 (or whatever I may decide). But for a sell order my SL will necessarily be lower than the CMP and Limit would be higher than CMP. However in the example above it is shown that --Limit----SL----CMP---which is not understood.Like (1)
Sumer Agarwal
12 Mar, 2015
Definitely STOPLOSS us a traders Best friend but the problem is you don't always remember to put itbdown and in the oricess bokk your prifits early or make huge losses. Duscipline is yhe main thing, remember!Like 
A.R. Nair
12 Mar, 2015
I fully appreciate the idea of stop loss as it helps us to reduce the loss. Is there any formula to calculate stop loss? or simply it is our own level to tolerate the loss. Your reply expected Like (1)
m.l.sinha
12 Mar, 2015
Dear sir, thank for posting such excellent guide and how to earn in stock market. Like 
Arun
12 Mar, 2015
I fully aqree with your view that stop loss is extremely importat in trading. Can I place stop loss as valid till cancel (vtc) order? Like 
V.K.Sundar Raj
12 Mar, 2015
Hi Apurva, Who refuses to have a friend? A friend in need is a friend indeed. Stoploss is well explained in simple terms and good example. What triggers me is arriving at the right price at which I have to book loss. As we are into technical trading, it would be of great help, if you could give us a technique or a tool. Let us continue with the journey that we have started. Like (2)
mohammed shabeer
11 Mar, 2015
Stoploss is a friend indeed. It may appear, sometimes,unnecessary, for trader it is best advised to place stoploss invariably atleast I think so from my short experienceLike (1)
THANGARAJU
11 Mar, 2015
If a stock is good one, definitely will move up in medium term, but do not know how much more it will go down, better to average it? What is your opinion? Can you explain advantage and disadvantage between the two "cost averaging & stop loss tool". thank youLike 
DIVEKAR
11 Mar, 2015
GOOD EXPLANATION. PLEASE EDUCATE US ON STARTING ACCOUNT BALANCE, NO OF SHARES, POSITION SIZE.. tHANKuLike (1)
MP Mittal
11 Mar, 2015
But the problem is how to fix the stop loss? You are never sure of the fluctuations in the rates of the scripts. At times it happens that you dispose them off and you find that you had taken a wrong decision. So how to calculate the stop loss target or take gain target?Like (2)
Anantharam
11 Mar, 2015
Hey Apurva Thanks very much! Your explanations of these basic concepts are very useful. Keep them coming! Rgds Anantharam PS: I only wish Assad also had done the same when he started Commodities trading sometime back, As a newcomer to trading this would have helped me save much losses...Like 
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