A Blunder To Avoid While Trading!

Matured traders always advice to put a stoploss whenever you initiate a trade. Stoploss is basically a limit order which gets executed as and when the price of the traded scrip reaches a certain price-level.  'Loss'  in the word essentially means that the price has moved adversely to your position.

An example to illustrate this simple phenomena:

Scrip: BHEL

The region between trigger price and stoploss (pink-shaded) is the region where a trade gets squared off . The gap between the trigger price and stoploss price has to be set depending upon the liquidity of the stock and the share price. Stocks that are heavily traded give you ample price-points such that you can keep the gap to a minimum. The share price of a stock also dictates the gap as larger the share price, larger will be the price movement of the scrip.

For example, TCS trades at around Rs 1500 per share. A bid and ask price chart for the stock will look something like this:

Buyers	Bid	No. of shares	No. of shares	Ask	Sellers
10	1510.1	35	22	1511	12
15	1509.5	44	55	1511.85	32
34	1508.9	75	75	1512.2	21

Now, a 30 paise stoploss-trigger price gap (as in above example) may not get executed at times. And that would fail the whole idea of putting up a stoploss.

So, the question is what is an optimal gap that should be maintained while placing a stoploss and trigger order?

There is no fixed rule.  Most of the traders would put it as per their comfort.

I generally decide the gap as below:

Price Range	Liquidity	Stoploss-Trigger Gap
Below 30	High	5 Paise
	Medium/Low	10 paise
30-60	High	10 paise
	Medium/Low	20 paise
60-200	High	30 paise
	Medium/Low	50-75 paise
200-500	High/Medium	50 paise
	Low	Re 1
500-1000	High/Medium	Re 0.75-1
	Low	Re 1-1.5

And so on.

I don't say these are ideal figures but this has worked amicably for me.

Another rule of thumb while deciding the stoploss-trigger gap is that the gap should be greater than the last 5-ticks of the stock price. The 'Next Best 5 Bid-Ask' chart of the stock can also be used to decide the effective gap of the stoploss and trigger price.

Not maintaining a good gap can be costly. I shorted BHEL today at 175.35 and placed a stoploss at 176.6 with the trigger price at 176.5. A gap of only 10 paise as against my normal practice of around 30-50 paise. At around 2:54 pm, the 2-minute chart of the stock shows the open price as 176.2 and a close price of 176.8. It never came between 176.5 and 176.6! And thus my stoploss was not triggered!

Thanks to the slow internet connectivity, by the time, I could make certain of this, the price zoomed to 180.

Now this is a silly mistake and paid a decent price for the same.

Hope you don't make the same mistake  (well, there are others you can make ;) )