Loss-Limit System for Traders

MARGINAL STOCK TRADER is not a stranger to losing money in online stock trading at the Philippine Stock Exchange trading his favorite stock Ayala Corporation. Of course, losing money in the stock market is inevitable for stock traders. And losing our hard-earned money is not an easy experience, which can be emotional at some point. Therefore, organizing a loss-limit system is critically important specially for small capital online stock traders.

Single trade loss limit
For our single trade loss limit, "a common level of acceptable loss for one's trading account is 2% of equity in the trading account" says Jason Van Bergen in his Investopedia article Limiting Losses. The capital in our trading account is our risk capital, the capital that we employ (that we risk) on a day-to-day basis to try to garner profits for our online stock trading business.

Monthly loss limit
"A general rule for overall monthly losses is a maximum of 6%" of our portfolio added Van Bergen. As soon as our account equity dips to 6% below that which it registered on the last day of the previous month, we stop trading.

Trading account
Marginal Stock Trader has a total of 10,000 pesos as of July 17, 2009 in his BPITrade trading account. This means when establishing our position, we should also establish a stop loss rule within a maximum of 2% loss of the total equity in our account. Our stop, however, may be anywhere from a 0-2% total loss. Thus, we set our 2% single trade loss limit at 200 pesos. Consequently, our 6% monthly loss limit is placed at 600 pesos.

Application of loss-limit system
Let us consider our trading portfolio of 20 shares of Ayala Corporation stock purchased at an average cost of 286 pesos or a total cost of 5,723 pesos. A loss of 200 pesos is equal to a net sales proceeds of 5,644 pesos. This is also equal to an exit price of 280 pesos pesos per share if all of our outstanding positions were to be closed all at once and the orders were to be placed with BPITrade. If done in two transactions, then our stop loss exit prices are placed at 265 pesos and 277.50 pesos.

Transaction Date	No. of Shares	Entry Price		Total Cost		Stop Loss Price
29-Jun-09	10	290		2,925.32		277.5
16-Jul-09	10	277.50		2,798.04		265
TOTAL	20			5,723.36		280

This arrangement fits well with our Marginal Stock Trader Updated Stock Trading Plan (For more, read Online Stock Trading Plan Updated).