Going long is another way of saying – buy. When we recommend a buy on a counter, we recommend an entry price. A trader / investor goes long ( or buys ) at that price. Since you are taking a bullish view on the stock / future / call / put that you are buying, you expect an appreciation in price. However, markets may feel otherwise and react downwards. Therefore a stop-loss is in order. Setting a stop loss is putting a limit on how much money you are willing to lose – before you initiate a trade. This practice ensures that your capital remains intact. On the flip side, one may or may not keep a stop profit limit. The matter is subject to personal preferences. You may want to let your profits run ( continue ) or set a stop profit and exit.
However, setting stop-losses is an art rather than a mathematical function. Setting a simple stop-loss is not enough. We therefore advocate setting trailing stop losses. Let’s take a hypothetical example –
Suppose you buy a scrip XYZ at Rs 100.
You set a stop loss of Rs 10 ( exit at Rs 90 )
The price starts moving above Rs. 100 and hits 110
You should modify your stop loss to trail the price – now the stop loss is at 100 – your capital is safe
The price of XYZ goes to 120, your stop loss trails to 110 – your capital has appreciated already. At this stage you can let your brokers computer take over the trade, while you divert your attention elsewhere – another trade, a movie or a holiday ! If the stop loss is “hit” you still make money, if the price keeps rising, so does your trailing stop loss and assured profits.
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