More on Stops.

A sensible discussion on the application of stops has started, and, I hope it continues.

Gaps
Piyush asks: “suppose you close the day at 5890, and so your stop does not get triggered, but the next day you come and see the market opening at 5800. now what?? shall i ait for the pullback to fill the gap or close my position immediately or wait for 15 or so minutes to see if the market is sliding or has any chances of reversal”

My Notes: Gaps are a problem for all traders. Sometimes, we have a gap open in our favor. Great. But, often, the market will open significantly against our position, thus triggering our stop. Then, the trader is faced with a decision: wait for the close or manage the trade now?

If I am long, for example, then the market opens below my stop loss, I first examine if the basis of my trade has changed. If it has, then I have to exit, the only question is how to exit. Usually, the 15 minute rule works well. I will exit if the 15 minute low is broken. If this low holds, then often, I get a better price on some intra day rally. But, I do not spend much time on managing the exit. I know, the trade needs to be closed.
In the context of the Nifty, 61.8% retracement of the previous upswing comes at 5832. Any open below this number tells me that the market may be changing direction, so the basis of the trade has probably changed.

But, we know that markets do not oblige us. What happens if the stop is at 5890, and, the Nifty opens at 5860? Now, the basis has not changed, but there is a lot of pain. There is no single answer to this situation. I usually bite the bullet and go with my ‘evaluate at close’ principle. If the trade is on EOD, then keep it on EOD.

I will answer the other questions over this holiday weekend. Cheers.