Monday, 19 April, 2010

Triggering the Stop Loss!!!


Triggering the Stop Loss!!!

There are times when a "copy and paste" job provides just the right material for an interesting post.

Here's one such case, from a mail that I received from a Yahoo group of which I'm a member.

Apparently, it is a mail that has been forwarded enough number of times for us to be unsure of the original source.

Read on:
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A wonderful explanation when to trigger the stop loss. This is taken from a mail forwarded to me by my friend in a broking house. If posted in past, please pardon me for re-posting.
Amit Shah I recently went to Hoshiarpur in Punjab (my in-laws).
A beautiful sleepy countryside paradise called Bachchauri.
In front of my in-laws house there is the house of a rich, educated and witty farmer who is very fond of discussing stock market with me whenever I go there.
This time we were discussing "stop loss".
We were standing near a neat and clean shed of 12 Buffaloes, all gleaming black like Cadillacs in a showroom!
All of these buffaloes had sharp horns!
Fortunately they were tied to pillars with ropes around 2-3 meters long!
"What would be the stop loss for you while in front of a Buffalo?" my farmer buddy asked me, tongue in cheek!
I looked in his eyes. "what kind of question is this?" I asked with a smile.
"Come on, tell me!" he insisted.
"First tell me, what can act as a stop loss for a charging buffalo?" I asked.
"when I shout the buffalo's name to her she dare not move an inch thereafter" declared my friend. "Now, tell me, what would be the stop loss for you while in front of a Buffalo?"
"Ok, in that case, I can take this hypothetical case" I retorted. "Look, my stop loss will be placed at a distance of X meters from the pillar from which the buffalo is tied up"
"What will be that distance?" he again quipped.
"It will be the length of buffalo + the length of the rope in her neck + length of her horns" I replied.
"what if the rope breaks?" he challenged!
I was not expecting this!
"What do you mean 'the rope breaks'" I asked.
"I mean where will you place the stop loss if the rope breaks?" he asked again. "Will you wait to trigger the stop loss expecting the buffalo to behave logically or will you trigger the stop loss?"
Both of us laughed our heart out!
He had conveyed the message he wanted to.
"When you don't know what is happening and the things have crossed your expectation limit, trigger the stop loss, for heavens sake!!!"
Regards,
N

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1 comment:

sunny said...

Very well said...
I generally put my stop loss below logical resistance levels or to the level of my apetite but if the falling curve of my share is too steep, I just sell those shares off.

But, the same should be applicable for profits.
If you expect a share to give you 10% profits by the month-end and your share has luckily rose 8% and now its expected to rise slowly. Its better to book profits now and put it on another good venture than waiting for the rest 2% rise.

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