Characteristics of Optimum Strategy:
The strategy should let the profit run, and must cut losses at right time. This is the most important factor, for any strategy, to become a successful strategy, as failing to cut losses at right time could prove to be a big mistake, same way, premature exit from potential multi baggers could also be considered a big mistake. People try to justify their action by thinking that its ok if they get less profit, but they fail to understand that the profit they fail to take a loss. Trader is enter the stock market to make profit, so trader should be able to take most of the profit, if not all. Any strategy we follow must ensure that this happens.
Keeping stop loss at a level, which ensures that capital, is safe and most of the profit is taken. It depends on individuals, and different people follow different strategy. Keeping 10 to 15% stop losses, can be too tight, as most of the stocks can gyrate up and down more than this during a weekly cycle, so one could exit the stock, and later on see the same stock recovering higher.
What happens in our strategy is that we keep stop losses based on averages, and those supports are well below 25% or more. This amount of stop loss can also sometimes considered tight, as during a correction in a rally, one could see a correction of 50%. This reason why we have kept this stop loss level is that even in case of such corrections, no point in losing more than 50%, with no guarantee that the stock would see an up move later. When the Bull Run is about to end, if we let the stock decline 50% then we lose a big amount of profit margin, which I believe we can’t let it happen. Though the overall portfolio impact may not be more than 15%, but during a reversal, most of the stocks could witness such movement, which on overall basis could have greater impact o our portfolio. If we keep the stop loss level based on averages, it saves most of the money, as a 25 to 30% stop loss trigger results into less than 6% capital erosion of the portfolio of 5 stocks as we divide 20% money in each stock. In this way, diversification helps.