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Exits: The Key To Your Trading – Part 4
  • : January 24, 2021
  • : B. Krishnakumar
Exits: The Key To Your Trading – Part 4
We discussed about essential factors to be considered while placing stop loss. The quality of your stop loss would play a big role in influencing your win-loss ratio as well as risk-reward ratio. Spend a lot of time in framing your stop loss and ensure that it suits your trading style and approach.

Practitioners of Point & Figure charts would typically use the basic signal in the opposite direction as their initial stop loss. That is, if you are long, the stop loss would typically be at a level where double bottom sell gets triggered.

Similarly, if you are short, the stop loss would be at the double top buy level. Now, you can make some tweaks to this basic approach. Instead of using the exact DTB or DBS level as your stop loss, give some allowance and place the stop loss a bit wider.

What I mean is, suppose you are trading with a 10-point box size and 3-box reversal. Assuming you are long, and your stop loss is at DBS level which is at say 1500. Rather than placing the stop loss exactly at 1500, you can give an allowance of one or two boxes and choose to the have the stop loss at 1490 or even at 1480.

This way, you are providing a little bit more wiggle room for price and the false exit related to “re-painting” issue can also be avoided. But, you must realize that by choosing this method, you are increasing the risk a wee bit. But this again is a trade-off for providing some cushion for volatility and wiggle room.

You can adopt the same approach for entries as well. Instead of placing an entry order exactly at the DTB or DBS level, you can choose to enter at one or two boxes above or below the entry level. Again, you must realize that this approach will increase your risk a little bit but that is the price that must be paid for confirmed entries. The basic signal, DTB or DBS is the most preferred or used stop loss for Point & Figure traders. Now think about other options for someone who wants to go beyond this basic signal and adopt some other option.

In Point & Figure chart, you can use the following tools as a stop loss option

  • Donchian Channel
  • Turtle Breakout
  • 10-Column Moving Average
  • Mini-top / Mini-bottom
  • 45-Degree Trendline

There are pros & cons in choosing the methods listed above. Choose the method that you prefer, backtest it thoroughly and then implement it. It makes sense to backtest using all methods and then decide the one that suits you.

Do not get into the habit of randomly switching from one method to another. This will take you no-where.

I hope you now have some idea about stop loss placements and the factors to be considered while framing the stop loss.

If you have any questions or doubts with respect to stop loss placement, then feel free to get in touch with me over email.

We will discuss more about trailing stop loss in the subsequent weeks.