Author: shyam

Using a Trailing Stop Loss (TSL) is one of the best ways to limit your downside and protect your winning trades. Instead of relying on your gut, here’s a straight-forward way to derive the appropriate TSL percentage for your trades.

ATR based TSL Percentage

ATR stands for Average True Range. It provides a measure of volatility that incorporates gap/limit moves. The range of a day’s trading is simply high – low. The true range extends it to yesterday’s closing price if it was outside of today’s range.¹

To set a TSL percentage, just multiply the latest daily ATR value by 2 and divide by the previous close.

What you are doing here is simply attaching a risk tolerance level (2) based on the stock’s intra-day moves averaged over a period of time.

Example

For example, if you were trading [stockquote]COLPAL[/stockquote] today, you would set the TSL to

2 * 30.5/1,250.65 = 4.88%

You can use StockViz to set a TSL alerts for your trades. Read this to see how.

Setting a stop loss can often times be an emotional decision. When you buy a stock, you expect it to go up; setting a stop loss at that point in time makes you play the devil’s advocate with yourself. Its not a nice feeling. However, setting a trailing stop loss, takes some of the pain away.

Quite simply, a trailing stop is not a fixed price at which you exit a loss making investment – it is a percentage below the most recent high set after you have made the buy.

For example, lets assume that you bought a stock at Rs. 100. It then proceeds to move in this fashion:

Watch how the trailing base, hugs the highs made by the stock after you bought it.

The stop loss is then triggered when the price falls x % below the trailing base.

In this example, if you set the trailing stop loss % as 5, the stop loss is triggered at point (7) highlighted in the chart.

The positives are many:

• You will never let a profitable trade turn into a loss making one
• It acts like a regular stop loss if the stock turns negative right after you buy it
• You don’t have to reset your stop every time the stock makes a move

StockViz is proud to announce the availability of Trailing Stop Loss Alerts for our users. Start using them now!