Here is the account of a trade that highlights the importance of Stops. Below is the 5-minute chart of Sunpharma scrip. The opening candle marked on the chart has an up wick which indicated weak bulls. After 40 minutes into opening a Dragon Fly Doji appeared on the screen. The candle's low is in confluence with yesterday's close. Immediately a confirmation candle also made its way into the chart.
That's when I decided to enter a long trade. The trade box is drawn on the chart. The trade details are as follows. Entry is @ 675.2, protective stop is @ 673.35, and the target is @ 681. This plan has 1:3 Risk-Rewards ratio. Reason for the target is that at 681- 682 levels there is a strong Resistance present. I also have drawn a horizontal box near 682 levels.
Now, as the trade was drawing near the target, I was
confident that the target would be achieved. But the opposite happened. Price
plummeted almost 10 points in the next candle bulldozing off my stop. STOPS ARE
OF PARAMOUNT IMPORTANCE IN TRADING. This is the biggest lesson for the day.
In fact an hour later there was a selling opportunity appeared at 672. But I dared not to take the trade. I was emotionally exhausted looking at this sudden big candle.
What about Nifty 50?
Before we see what happened today, I desire to log here what transpired yesterday in Nifty 50 briefly. Yesterday's opening candle is marked in the chart. Yesterday Nifty opened Gap up and made an all-time High at 15900. All through the day Nifty stayed sideways finding stiff resistance near the current weekly pivot 'R1'. Below is the 5-minute chart of Nifty 50.
Now, let's look at what happened today in Nifty. Today's open candle is marked as well. It has a beautiful down wick which signaled weak bulls. A confirmation candle followed as well. To take long trade the Risk-Rewards ratio was unfavorable.
From 9:35 onward, Nifty started falling and made its first low near 15755 at 12:40. Later, Nifty attempted retrace the morning fall. But, Nifty was bucked strongly near the low of the opening candle that sent Nifty 50 down again and the broader index closed -0.64% lower for the day.