If we keep stop loss very near to buy price, chance of SL getting hit very often is high. If we keep stop loss very far from buy price, then just one wrong trade can wipe out profits from ten trades. So we should keep stop loss at the optimal level. That’s where Previous Swing Low helps!
Previous Swing Low!
Just keep this in mind when you take your next trade. Whenever you buy a stock, check what was its recent low made by the stock. Stock price movement is all based human emotions, when a stock recently reached a low levels and bounced back from that level, it denotes beyond certain point more buyers are jumping in to buy that stock.
So the point from where the stock stopped going down and start going up is the reversal point, if you keep your stop loss just below that level then chance of your stop loss getting hit is lower.
Most people just keep random stop loss level based on their capital or comfort level. If you trade with Rs.1 lac capital, most people wanted to get out of the position if their loss exceeds Rs.1000 or Rs.2000. That’s where there comfort level is.
Consider below chart of Deepak Nitrate, this stock moved from 400 levels to 2500 levels, the red circles marked are swing low. Those are the price levels where stock dropped but did not go down further and started resuming the uptrend again. If am buying the stock at the first green arrow mark around Rs.900, then i will keep my stop loss near previous low price, which is near Rs800 level. The stock continued to move up and make new high.
If am entering at second arrow mark level of Rs.1200, then i will keep my stop loss near previous swing loww which is near Rs.1000. Like wise you can keep trailing your stop loss to previous swing low level as long as price continues to move up. This way you don’t get stopped out often and tend to ride the trend to the fullest and make higher profits.