The Hindu Business Line : Tech Tools

I am a long-term investor and follow trend-line on weekly chart with stop loss at a recent low of the stock as suggested in one of your articles. I sold one stock immediately after the stop loss was hit. But the stock moved higher afterwards. Is this the right way to exit. Or shall I wait until the stop loss is breached a number times and clear confirmation is received? Seshan Narayanan

Stop losses are imperative for minimising the risk in a trade. Stop loss level is typically placed at the point below the support from which we expect the stock to reverse. It is, however, quite common for the stock to hit the stop loss level, resulting in the position getting closed, and then reversing from there. This is a small hazard that a trader should be willing to face in order to minimise risk. Consider the situation when the stop loss is not adhered to and the position turns in to a large loss. A small loss is always preferable to a large one.

There is no need to wait for the stop to be hit a number of times before exiting. If the stock reverses from a level a number of times, it turns in to a strong support and thus turns in to a buying point. Hitting the stop loss level once during the trading day is sufficient for exiting a position.

Long-term investors like you can, however, employ a couple of tactics to avoid the situation that you have outlined. Firstly, wait for the stop loss to be breached on a closing basis. That is, the stock should close beyond the stop loss level. If the stock continues to trade beyond the level the next day as well, then exit the position.

Mental stop loss is another method employed by some. Mental stops are stop loss levels that are not punched in to the online system but just noted mentally. However, there are many perils with this kind of stop. The investor needs to keep a stressful vigil on the stock price movement. And then, there is always the temptation to slide the mental stop just a teeny-weeny bit lower once the original stop has been hit.

When price of a stock moves above life-time high, the RSI will be naturally above 70. How can a selling decision be made based on RSI? T. Sutha, Bhavani

RSI or the relative strength indicator is one of the momentum indicators, which forewarns the analysts regarding the slowing momentum in a stock. There are a few methods in which sell signals can be gleaned even while the RSI rules above 70.

Watch for positive or negative divergences, even as the indicator reads above 70. Positive divergence occurs when the indicator is moving higher while the stock price is moving lower. Negative divergence occurs when the stock price is moving higher while the indicator is moving lower. Negative divergence signals a sell while the positive divergence is a buy signal. Use an average line with the RSI to indicate sells. A nine-day average with a 14-day RSI is generally effective.

But many oscillators turn ineffective in a prolonged up trend or down trend. The oscillator moves above 70 and stays above this level for a long time without giving a clear signal. In such a circumstance, other technical tools need to be resorted to indicate exit points.

I have purchased Sasken Communications two years ago at an average price of Rs 419. Should I exit the stock or hold onto it? Chandrima Shaha

Sasken Communications (Rs 475.3): The outlook for Sasken Communications is positive for the next one year. The sideways move since January 2007 in the range between Rs 480 and Rs 620 could be a precursor to a break-out to Rs 710 or Rs 854. Hold with a stop at Rs 390. A fall below Rs 400 is required to reverse the positive outlook in this stock. Dips to Rs 400 should be utilised to increase the holdings in this stock.

Lokeshwarri S.K.

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