COMDEX EDUCATION An idea takes wing.

Stop Loss Special

RCL / 2006 / VOL – 7
17th April, 2006

What is Stop Loss?

It is an order placed with a broker to buy or sell once the stock reaches a certain price.
A stop loss is designed to limit an investor's loss on a security position. Setting a stop
loss order for 5% below the price at which you bought the stock will limit your loss to
5%. For example, let's say you just purchased URAD at Rs.3,000 per Lot. Right after
buying the commodity you enter a stop loss market order for Rs. 2985.00. This means
that if the stock falls below Rs. 2985.00 per Lot your Commodity will then be sold at
the prevailing market price.

Positives and Negatives

The advantage of a stop order is you don't have to monitor on a daily basis how a
commodity is performing. This is especially handy when you are on vacation or having
a full time job that prevents you from watching your commodity for an extended period
oftime.

The disadvantage is that the stop price could be activated by a short-term fluctuation in
a commodity price. The key is picking a stop-loss percentage that allows a commodity
to fluctuate day-to-day while preventing as much downside risk as possible. Setting a
5% stop-loss on a commodity that has a history of fluctuating 10% or more is not the
best strategy: you will most likely just lose money on the commissions generated from
the execution of your stop-loss orders. There are no hard and fast rules for the level at
which stops should be placed. This totally depends on your individual investing style:
an active trader might use 5% while a long term investor might choose 15% or more.

Another thing to keep in mind is that once your stop price is reached, your stop order is
a market order, the price at which you sell may be much different from the stop price.
This is especially true in a fast-moving market where commodity prices can change
rapidly.
 COMDEX EDUCATION An idea takes wing.
Stop Loss Special
RCL / 2006 / VOL – 7
17th April, 2006

Trailing Stop-Loss

The most basic technique for establishing an appropriate exit point is the trailing stop
technique. Very simply, the trailing stop maintains a stop-loss order at a precise
percentage below the market price (or above, in the case of a short position).

The stop-loss order is adjusted continually based on fluctuations in the market price,
always maintaining the same percentage below (or above) the market price. The trader
is then "guaranteed" to know the exact minimum profit that his position will garner.
Here, the stop-loss order is set at a percentage level below not the price at which you
bought it but the current market price. The price of the stop loss adjusted as the
commodity price fluctuates. Remember, if a stock goes up, what you have is an
unrealized gain, which means you don't have the cash in hand until you sell. Using a
trailing stop allows you to let profits run while at the same time guaranteeing at least
some realized capital gain.
Stop loss orders are traditionally thought of as a way to prevent losses. (After all, it's
called a "stop loss" for a reason.) Another use of this tool, though, is to lock-in profits,
in which case it is sometimes referred to as a trailing stop.

In all forms of long-term investing and short-term trading, deciding the appropriate
time to exit a position is just as important as, if not more important than, determining
the best time to enter into your position. Buying (or selling, in the case of a short
position) is a relatively less emotional action than selling (or buying, in the case of a
short position). When you enter a position, the potential for realized profits is but a
dream and the possibility of losses is only a vaguely considered nightmare.

Limiting Losses
It is simply not possible for any trader--whether amateur, professional or anywhere in
between--to avoid every single loss. The disciplined trader is fully cognizant of the
inevitability of losing hard-earned profits and, as such, is able to accept losses without
emotional upheaval.
 COMDEX EDUCATION An idea takes wing.
Stop Loss Special
RCL / 2006 / VOL – 7
17th April, 2006

At the same time, however, there are systematic methods by which you can ensure that
losses are kept to a minimum.

A stop loss order is such a simple little tool, yet so many traders fail to use it. Whether to
prevent excessive losses or to lock-in profits, nearly all investing styles can benefit from
this trade. Think of a stop loss as an insurance policy: you hope you never have to use it,
but it's good to know you have the protection if you need it.

Glossary of Commonly Used in Stop Loss

STOP-LOSS - A price order to exit a market at a specified price. A stop-loss order will
always be an order to do the opposite of an open position. If you are long (bought) you
place a stop-loss order to sell. If you are short (sold) you place a stop-loss order to buy.

STOP-LOSS ORDER - The same as a stop order except it is meant to offset an existing
futures position (long or short).

STOP ORDER - A stop order is simply an order to buy or sell a futures contract if the
market moves to the price you indicate. When the market does touch that specified price,
your stop order becomes a market order.

From the Research Desk of Religare Comdex Ltd, 19, Nehru Place, New Delhi – 19, Email :- comdexresearch@religare.in.